-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J0kSegGwVvZklFcPdqdG5GaSH5swlo+uScOK7AGAPmauPmQY9QsKtq85dqMpFhak tL+ZGP7Uwrl21KXmkMpbCA== /in/edgar/work/0000912057-00-044564/0000912057-00-044564.txt : 20001013 0000912057-00-044564.hdr.sgml : 20001013 ACCESSION NUMBER: 0000912057-00-044564 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000901 FILED AS OF DATE: 20001012 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALM INC CENTRAL INDEX KEY: 0001100389 STANDARD INDUSTRIAL CLASSIFICATION: [3575 ] IRS NUMBER: 943150688 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-29597 FILM NUMBER: 738998 BUSINESS ADDRESS: STREET 1: 5470 GREAT AMERICA PARKWAY CITY: SANTA CLARA STATE: CA ZIP: 95052 BUSINESS PHONE: 4083269000 MAIL ADDRESS: STREET 1: 5470 GREAT AMERICA PARKWAY CITY: SANTA CLARA STATE: CA ZIP: 95052-8145 10-Q 1 a2027596z10-q.txt 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 1, 2000 COMMISSION FILE NO. 0-29597 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ____________ PALM, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3150688 --------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5470 GREAT AMERICA PARKWAY 95052 SANTA CLARA, CALIFORNIA ----- ----------------------- (Zip Code) (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 326-9000 FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT: N/A INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- AS OF OCTOBER 2, 2000, 565,890,034 SHARES OF THE REGISTRANT'S COMMON STOCK WERE OUTSTANDING. THIS REPORT CONTAINS A TOTAL OF 38 PAGES OF WHICH THIS PAGE IS NUMBER 1. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PALM, INC. TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Statements of Operations THREE MONTHS ENDED SEPTEMBER 1, 2000 AND AUGUST 27, 1999 3 Condensed Consolidated Balance Sheets SEPTEMBER 1, 2000 AND JUNE 2, 2000 4 Condensed Consolidated Statements of Cash Flows THREE MONTHS ENDED SEPTEMBER 1, 2000 AND AUGUST 27, 1999 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 35 ITEM 6. Exhibits and Reports on Form 8-K 36 Signatures 38
Palm OS and Palm.Net are registered trademarks and Palm, Palm VII and Palm VIIx are trademarks of Palm, Inc. or its subsidiaries. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PALM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended ------------------------------- September 1, August 27, 2000 1999 ------------- ------------ Revenues $ 400,976 $ 176,505 Cost of revenues 247,513 98,324 ------------- ------------- Gross profit 153,463 78,181 ------------- ------------- Operating expenses: Sales and marketing 76,001 42,514 Research and development 30,320 12,134 General and administrative 20,491 7,160 Amortization of goodwill and intangible assets 5,235 507 Purchased in-process technology 853 - Separation costs 1,815 - ------------- ------------- Total operating expenses 134,715 62,315 ------------- ------------- Operating income 18,748 15,866 Interest and other income (expense), net 13,244 (63) ------------- ------------- Income before income taxes 31,992 15,803 Income tax provision 14,717 6,145 ------------- ------------- Net income $ 17,275 $ 9,658 ============= ============= Net income per share: Basic $ 0.03 $ 0.02 Diluted $ 0.03 $ 0.02 Shares used in computing per share amounts: Basic 565,149 532,000 Diluted 568,095 532,000
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 PALM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value amounts)
September 1, June 2, 2000 2000 ------------ ------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 703,173 $1,062,128 Short-term investments 224,417 - Accounts receivable, net of allowance for doubtful accounts of $9,165 and $6,810, respectively 221,357 122,276 Inventories 31,666 24,057 Deferred income taxes 47,704 34,907 Prepaids and other 29,666 9,590 ---------- ------------ Total current assets 1,257,983 1,252,958 Property and equipment, net 25,026 13,013 Goodwill, intangibles and other assets 97,981 14,330 Deferred income taxes - 2,375 ---------- ------------ Total assets $1,380,990 $1,282,676 ========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 170,461 $ 123,106 Other accrued liabilities 135,687 117,376 ---------- ------------ Total current liabilities 306,148 240,482 Non-current liabilities: Deferred income taxes 4,985 - Deferred revenue and other 12,176 13,006 Stockholders' equity: Preferred stock, $.001 par value, 125,000 shares authorized; none outstanding - - Common stock, $.001 par value, 2,000,000 shares authorized; outstanding: September 1, 2000, 565,345; June 2, 2000, 564,963 565 565 Additional paid-in capital 1,045,172 1,032,449 Unamortized restricted stock grants (17,683) (16,053) Retained earnings 29,712 12,437 Accumulated other comprehensive income (loss) (85) (210) ---------- ------------ Total stockholders' equity 1,057,681 1,029,188 ---------- ------------ Total liabilities and stockholders' equity $1,380,990 $1,282,676 ========== ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 PALM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended --------------------------------- September 1, August 27, 2000 1999 ------------- ----------- Cash flows from operating activities: Net income $ 17,275 $ 9,658 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 7,893 2,085 Amortization of restricted stock 1,548 - Loss on disposal of property and equipment 8 - Deferred income taxes (8,526) (2,723) Purchased in-process technology 853 - Changes in assets and liabilities: Accounts receivable (98,817) 9,623 Inventories (7,609) (19,044) Prepaids and other (21,532) (91) Accounts payable 45,718 15,518 Other accrued liabilities 8,052 (4,955) ------------- ------------ Net cash provided by (used in) operating activities (55,137) 10,071 ------------- ------------ Cash flows from investing activities: Purchases of property and equipment (12,084) (2,289) Acquisition of businesses, net of cash acquired (67,023) - Purchases of short-term investments (224,417) - Other, net (2,180) - ------------- ------------ Net cash used in investing activities (305,704) (2,289) ------------- ------------ Cash flows from financing activities: Proceeds from issuance of common stock 3,178 - Net transfers from 3Com Corporation - 29,095 Repayments of debt (1,295) - Other, net 3 (217) ------------- ------------ Net cash provided by financing activities 1,886 28,878 ------------- ------------ Change in cash and cash equivalents (358,955) 36,660 Cash and cash equivalents, beginning of period 1,062,128 478 ------------- ------------ Cash and cash equivalents, end of period $ 703,173 $ 37,138 ============= ============ Other cash flow information: Cash paid for interest $ 17 $ 9 ============= ============ Tax benefit from employee stock options $ 1,695 $ - ============= ============ Unrealized gain/loss on investments $ 122 $ - ============= ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 PALM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The condensed consolidated financial statements have been prepared by Palm, Inc. ("Palm," "us," "we," or "our"), without audit, pursuant to the rules of the Securities and Exchange Commission ("SEC"). In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of Palm's financial position as of September 1, 2000 and Palm's results of operations and cash flows for the three months ended September 1, 2000 and August 27, 1999. Certain prior year balances have been reclassified to conform to the current year presentation. Palm has a 52-53 week fiscal year ending on the Friday nearest to May 31. Accordingly, fiscal 2001 will end on June 1, 2001, resulting in a 52-week fiscal 2001, compared to 53 weeks as reported in fiscal 2000. The results of operations for the three months ended September 1, 2000 may not be indicative of the results to be expected for the fiscal year ending June 1, 2001. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Palm's Annual Report on Form 10-K for the fiscal year ended June 2, 2000. Through February 25, 2000, Palm was wholly-owned by 3Com Corporation ("3Com"). Through this date, Palm's condensed consolidated financial statements reflect the historical results of operations and cash flows of the handheld computing business of 3Com during each respective period. The condensed consolidated financial statements have been prepared using 3Com's historical bases in the assets and liabilities and the historical results of operations of Palm. The financial information included herein may not reflect the consolidated financial statements, operating results and cash flows of Palm in the future or what they would have been had Palm been a separate stand-alone entity during the periods presented. Through February 25, 2000, the condensed consolidated financial statements include allocations of certain 3Com expenses, including centralized legal, accounting, treasury, real estate, information technology, distribution, customer service, sales, marketing, engineering, and other 3Com corporate services and infrastructure costs. The expense allocations have been determined on the bases that 3Com and Palm considered to be reasonable reflections of the utilization of services provided or the benefit received by Palm. The allocation methods include relative revenues, headcount or square footage. Management believes that the expenses allocated to Palm are representative of the operating expenses it would have incurred had Palm been operated on a stand-alone basis. 6 The allocated amounts from 3Com included in Palm's condensed consolidated statement of operations for the three months ended August 27, 1999 were as follows (in thousands):
Cost of revenues $ 2,920 Sales and marketing 5,446 Research and development 1,647 General and administrative 3,952 Other (income) and expense, net 63
2. Separation from 3Com and Initial Public Offering On September 13, 1999, 3Com announced its plan to create an independent publicly-traded company, Palm, Inc., comprised of 3Com's handheld computing business. Following the completion of Palm's initial public offering in March 2000, 3Com owned 532,000,000 shares of Palm, representing approximately 94% of Palm's outstanding common stock. On July 27, 2000, 3Com distributed the shares of Palm common stock it owned to the stockholders of 3Com, and options to purchase shares of 3Com common stock held by Palm employees were converted into options to purchase shares of Palm common stock. 3Com and Palm entered into a Master Separation and Distribution Agreement in December 1999. In accordance with the separation agreement, 3Com transferred to Palm the 3Com-owned assets and liabilities which related to Palm prior to the date of separation from 3Com, except for most of Palm's accounts receivable and accounts payable, which were retained by 3Com for administrative convenience. Palm began incurring separation costs in the second quarter of fiscal 2000, which are costs associated with the process of becoming a stand-alone, publicly-held company, including consulting and professional fees. Palm's legal separation from 3Com occurred on February 26, 2000 ("the separation date"), at which time Palm began to operate independently from 3Com. Beginning in the fourth quarter of fiscal 2000, Palm's consolidated financial statements no longer include an allocated portion of 3Com's corporate services and infrastructure costs. However, Palm continues to incur amounts payable to 3Com under transitional service agreements, under which 3Com provides services such as information systems, real estate and transaction processing in accounting and human resources. Expenses incurred to 3Com under transitional service agreements and facilities lease agreements during the three months ended September 1, 2000 totaled $9.3 million. Palm completed its initial public offering in March 2000, receiving net proceeds of $947.5 million, after deducting underwriting commissions and offering expenses, from the sale of 26,450,000 shares of common stock. Palm also received net proceeds of $225.0 million from the sale of a total of 5,921,052 shares of common stock to America Online, Motorola and Nokia in private placements. Using a portion of the proceeds from the offering, Palm paid a dividend of $150.0 million to 3Com in March 2000. In May 2000, Palm entered into an agreement with 3Com permitting the purchase and sale of approximately 39 acres of land located in San Jose, California. Palm was required to place a deposit pending the assignment of its obligations under the agreement to a third party. Such assignment occurred in conjunction with an operating lease agreement which Palm entered into September 2000 (see Note 9 to the condensed consolidated financial statements). 7 3. Comprehensive Income The components of comprehensive income are as follows (in thousands):
Three Months Ended ----------------------------- September 1, August 27, 2000 1999 ----------- ----------- Net income $ 17,275 $ 9,658 Other comprehensive income: Unrealized gain on investments 122 - Change in accumulated translation adjustments 3 15 --------- ----------- Total comprehensive income $ 17,400 $ 9,673 ========= ===========
4. Net Income Per Share Basic net income per share is calculated based on the weighted average shares of common stock outstanding during the period. Diluted net income per share is calculated based on the weighted average shares of common stock outstanding, plus the dilutive effect of stock options, calculated using the treasury stock method. The dilutive effect of stock options was approximately 2,946,000 shares for the first quarter of fiscal 2001. For the first quarter of fiscal 2000, there was no dilutive effect from stock options, as there were no Palm stock options outstanding. 5. Inventories Inventories consist of (in thousands):
September 1, June 2, 2000 2000 ------------ --------- Finished goods $ 27,204 $ 22,557 Work-in-process 4,462 1,500 Purchased components - - ---------- ---------- $ 31,666 $ 24,057 ========== ==========
6. Acquisition of AnyDay.com During the first quarter of fiscal 2001, Palm completed the acquisition of AnyDay.com. The total purchase price of $85.7 million consisted of $71.4 million of cash, $4.7 million of stock options assumed, contractual commitments of $9.2 million and direct transaction costs of $0.4 million. Total liabilities assumed in the transaction of $13.7 million included accounts payable, accrued liabilities, contractual commitments and long-term debt. The purchase price was allocated as follows: identifiable intangible assets - $20.3 million, net tangible assets - $2.3 million, purchased in-process technology - $0.9 million, and goodwill - $65.3 million. Goodwill and other intangible assets from the AnyDay.com acquisition are being amortized over periods ranging from two to four years. The purchased in-process technology of $0.9 million had not reached technological feasibility, had no alternative future use and was 8 charged to operations in the first quarter of fiscal 2001. 7. Litigation Palm is a party to lawsuits in the normal course of its business. Litigation in general, and intellectual property litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Palm believes that it has defenses to the cases set forth below and is vigorously contesting these matters. Palm is not currently able to estimate the possible loss, or range of loss, if any, from the cases listed below and an unfavorable resolution of these lawsuits could adversely affect Palm's business, results of operations or financial condition. On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics Corporation and U.S. Robotics Access Corp. in the United States District Court for the Western District of New York. The case is now captioned: XEROX CORPORATION v. U.S. ROBOTICS CORPORATION, U.S. ROBOTICS ACCESS CORP., PALM COMPUTING, INC. AND 3COM CORPORATION, Civil Action No. 97-CV-6182T. The complaint alleged willful infringement of U.S. patent 5,596,656 entitled "Unistrokes for Computerized Interpretation of Handwriting." The complaint sought unspecified damages and to permanently enjoin the defendants from infringing the patent in the future. In an Order entered by the District Court on June 6, 2000, the District Court granted the defendants' motion for summary judgment of non-infringement and dismissed the case in its entirety. On July 5, 2000, Xerox filed a Notice of Appeal of the dismissal with the U.S. Court of Appeals for the Federal Circuit. On July 22, 1999, Palm filed a copyright infringement action against Olivetti and CompanionLink in the United States District Court for the Northern District of California and obtained a preliminary injunction against further distribution, sale, import or export of Olivetti Office USA's "Royal daVinci" handheld device and the daVinci OS Software Development Kit (distributed by CompanionLink Software, Inc.), which contained source code copied from the Palm OS operating system. The injunction is to remain in effect pending the outcome of the lawsuit. Palm also initiated a copyright infringement action in Hong Kong on July 21, 1999, against EchoLink Design Ltd., the company responsible for developing the operating system software contained in the daVinci products. The High Court of the Hong Kong Special Administrative Region issued an order the same day restraining EchoLink from further copying, distribution, sale, import or export of Palm OS operating system source code or EchoLink's "NEXUS OS" source code, which Palm maintains infringes its copyrights. On October 7, 1999, 3Com notified certain third-party retailers about the preliminary injunction order cited above. Olivetti has filed a motion seeking leave to assert counterclaims against Palm and 3Com for unfair competition, intentional interference with potential economic advantage, libel and trade libel, based upon certain statements that were allegedly made, or that 3Com allegedly omitted to make, in the October 7, 1999 letter. On December 13, 1999, WaveWare Communications, Inc. filed suit against 3Com, Palm and others in the Superior Court of California, San Mateo County. The case is captioned WAVEWARE COMMUNICATIONS, INC. v. 3COM CORPORATION, PALM COMPUTING, INC., AND MARK BERCOW, No. 9 411331. The complaint alleges breach of contract, constructive fraud, fraud and deceit, negligent misrepresentation, misappropriation of assets and trade secrets, unfair competition, unjust enrichment and intentional interference with economic advantage in connection with our and 3Com's discussions with WaveWare concerning WaveWare's potential acquisition by 3Com. The complaint seeks unspecified monetary damages and injunctive relief. Discovery is ongoing and the case is set for trial in January 2001. On December 27, 1999, Telxon Corporation and Penright! Corporation filed a complaint in the U.S. District Court for the Northern District of Ohio, Eastern Division (Case No. 1:99CV3157) against 3Com and Palm alleging copyright infringement, unfair competition and theft of trade secrets. In an Order dated July 31, 2000, the Federal Judge assigned to the action transferred the case to the U.S. District Court for the Northern District of California. The case is now captioned TELXON CORPORATION V. 3COM INC. (CASE NO. C00-02885 CRB). The plaintiffs allege that the Palm OS operating system contains graphical user interface software copied from the plaintiffs' software. The complaint seeks unspecified compensatory and treble damages and to enjoin, among other things, distribution and sales of the Palm OS operating system. No trial date has been set. The case is still in the early stages of discovery. On February 28, 2000, E-Pass Technologies, Inc. filed suit against "3Com, Inc." in the United States District Court for the Southern District of New York and later filed on March 6, 2000 an Amended Complaint against Palm and 3Com. In an Order dated June 9, 2000, the Federal Judge assigned to the action transferred the case to the U.S. District Court for the Northern District of California. The case is now captioned E-PASS TECHNOLOGIES, INC. V. 3COM CORPORATION, A/K/A 3COM, INC. AND PALM, INC. (Case No. C00 2255-DLH ADR). The Amended Complaint alleges willful infringement of U.S. patent 5,276,311 entitled "Method and Device for Simplifying the Use of Credit Cards, or the Like." The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patent in the future. Palm is in the preliminary stages of investigating the allegations contained in the suit. No trial date has been set. The case is still in the early stages of discovery. On May 2, 2000, Rotis Technologies Corporation filed suit against Palm and two other defendants in the U.S. District Court for the Northern District of Texas. The case is now captioned ROTIS TECHNOLOGIES CORPORATION V. TRACK DATA CORPORATION, PALM, INC. AND SPRINT SPECTRUM L.P. (Case No. 300CV-931-L). The complaint alleges infringement of U.S. patent 4,473,824 entitled "Price Quotation System." The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patent in the future. Palm is in the preliminary stages of investigating the allegations contained in the suit. No trial date has been set. The case is still in the early stages of discovery. 8. Recent Accounting Pronouncements In June 1998 and June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 137, 10 Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133. These statements require companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 will be effective for Palm's fiscal year ending May 31, 2002. Management is currently in the process of assessing the impact of SFAS 133 and believes that the adoption of these statements is unlikely to have a significant impact on Palm's financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 will be effective for Palm's fiscal year ending June 1, 2001. Due to the potential impact of certain provisions of SAB 101 for which registrants have requested interpretative guidance, Palm has not yet determined the impact, if any, that SAB 101 may have on its financial position or results of operations. In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of APB 25 for certain issues, including the definition of an employee, the treatment of the acceleration of stock options and the accounting treatment for options assumed in business combinations. FIN 44 became effective on July 1, 2000, but is applicable for certain transactions dating back to December 1998. The adoption of FIN 44 is not expected to have a significant impact on Palm's historical financial position or results of operations. 9. Subsequent Events Subsequent to quarter-end, we entered into an operating lease agreement related to our new corporate campus, for which occupancy is planned beginning in mid-2002. In conjunction with this agreement, we are required to guarantee a minimum residual value for the property and to maintain certain levels of cash collateral over the term of the agreement. Such cash collateral will be classified as non-current restricted cash in our consolidated balance sheet and totaled approximately $225 million at the inception of the lease agreement. As the leased facilities are constructed the amount of cash collateral required to be maintained is expected to increase to at least $400 million. Palm will continue to receive the interest income earned on the cash collateral. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This quarterly report contains forward-looking statements within the meaning of the federal securities laws. These statements include those concerning the following: the intention to continue pursuing licensing opportunities for the Palm platform; the intention to expand Internet services and solutions; the intention to continue to expand Palm's international business; the intention to make strategic investments to enhance, develop and introduce products and Internet solutions; the intention to introduce new products, designs and Internet solutions; the intention to make strategic acquisitions; the intention to continue Palm's strategic alliances and relationships with other companies; Palm's expectation that an increasing portion of its revenues will come from Palm platform licensing and Internet services and solutions; Palm's expectation that international revenues will continue to increase as a percentage of total revenues; Palm's belief that it will continue to experience strong growth in unit shipments of Palm handheld devices; Palm's expectation of future gross margins; Palm's expectation that it will make significant strategic investments throughout fiscal year 2001; Palm's anticipation of future operating margins and interest income; and Palm's belief that its cash and cash equivalents will be sufficient to satisfy its anticipated cash requirements for at least the next 12 months. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. These risks and uncertainties include, among others: possible development or marketing delays with the products and solutions to be offered; potential defects in the products and solutions to be developed; the acceptance by the market of these products and solutions; possible fluctuations in demand for Palm's products and services; Palm's ability to anticipate demand for its products and services in order to secure sufficient quantities or cost-effective production and avoid costly excess production or inventories; Palm's dependence on suppliers and distributors; Palm's ability to compete effectively with existing or new competitors; possible future price cutting or other actions by competitors; and Palm's ability to successfully work with other companies and secure resources to realize the benefits of Palm's alliances. For a detailed discussion of these risks and uncertainties, see the "Business Environment and Risk Factors" section of this report. Palm undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report. OVERVIEW We were founded in 1992 and introduced our first handheld device in 1996. Immediately prior to our initial public offering on March 2, 2000, we were a wholly-owned subsidiary of 3Com. Through 1999, our business was focused primarily on developing and selling our Palm-branded handheld devices, and as of September 1, 2000, we had sold over 8.7 million Palm devices worldwide. In 1999, we expanded our strategy of licensing our Palm platform and developed our wireless Internet access service to support Internet-enabled handheld devices. Our revenues have increased from approximately $1 million in fiscal 1995 to approximately $1.06 billion in fiscal 2000. Through our initial public offering and concurrent private placements to America Online, Motorola, and Nokia, we raised net proceeds of $1.17 billion, out of which a dividend of $150 million was paid to 3Com. On July 27, 2000, 3Com completed the distribution of the remaining shares of Palm it owned to the stockholders of 3Com. Immediately prior to the distribution, 3Com owned approximately 94% of the Palm shares outstanding. Substantially all of our revenues to date have been generated from sales of our handheld devices and related peripherals and accessories. A small percentage of our revenues have been derived from licensing our Palm platform or from subscriptions to our wireless Internet access service. With our 12 expanded focus on Palm platform licensing and Internet services and solutions, we expect that an increasing portion of our revenues in future periods will come from these sources, although they will still represent a relatively small portion of our total revenues in fiscal 2001. International revenues represented 31% of total revenues in both the first quarter of fiscal 2001 and the first quarter of fiscal 2000. International revenues have generally been increasing as a percentage of total revenues, and this trend is expected to continue, although there may be quarters in which international revenues decline as a percentage of total revenue. We believe that we will continue to experience strong growth in unit shipments of our Palm handheld devices, although the year over year growth rates may decline on a percentage basis compared to recent levels. Gross margins as a percentage of revenues remained relatively constant through the third quarter of fiscal 2000, but have declined over the past two quarters. Gross margin levels declined significantly from the first quarter of fiscal 2000 to the first quarter of fiscal 2001, and we anticipate that gross margins in fiscal 2001 will remain lower than gross margins in fiscal 2000. Factors which we believe may contribute to lower gross margins in fiscal 2001 relative to fiscal 2000 include increased competition, introduction of new entry level price point devices, supply constraints for certain components, and an increased percentage of our revenue being derived from wireless Internet services and solutions. In line with our strategy to expand our business, we expect to continue to make significant strategic investments throughout fiscal year 2001. These investments will focus on development and introduction of new products and Internet solutions, continued expansion into new customer segments and geographic regions, as well as other marketing investments. We also expect to continue to incur some duplication of costs during fiscal 2001 as we continue to build the infrastructure necessary for a stand-alone public company, while also paying 3Com to perform certain of these services under transition service agreements. In addition, we expect to incur costs related to our separation from 3Com throughout fiscal 2001. Due primarily to the impact of these factors, our operating margins declined in the first quarter of fiscal 2001 as compared to the same period in the previous year. We anticipate our operating margins will continue to be lower in fiscal 2001 than they were in fiscal 2000, and there may be quarters in which we report operating losses as we invest to expand our business, take advantage of market opportunities and execute our strategic plan as an independent stand-alone company. Furthermore, we intend to make strategic acquisitions, which will likely result in amortization costs that could adversely effect our operating results. 13 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of total revenues represented by the line items reflected in Palm's condensed consolidated statements of operations:
Three Months Ended ------------------ September 1, August 27, 2000 1999 ------------ ---------- Revenues 100.0% 100.0% Cost of revenues 61.7 55.7 ------ ------ Gross profit 38.3 44.3 Operating expenses: Sales and marketing 19.0 24.1 Research and development 7.6 6.9 General and administrative 5.1 4.0 Amortization of goodwill and intangible assets 1.3 0.3 Purchased in-process technology 0.2 - Separation costs 0.4 - ------ ------ Total operating expenses 33.6 35.3 ------ ------ Operating income 4.7 9.0 Interest and other income (expense), net 3.3 - ------ ------ Income before income taxes 8.0 9.0 Income tax provision 3.7 3.5 ------ ------ Net income 4.3% 5.5% ====== ====== Effective tax rate (percentage of income before income taxes) 46.0% 38.9% Excluding amortization of goodwill and intangible assets, purchased in-process technology and separation costs: Total operating expenses 31.7% 35.0% Operating income 6.6% 9.3% Effective tax rate 40.0% 38.9%
REVENUES Revenues for the first quarter of fiscal 2001 were $401.0 million, an increase of $224.5 million or 127% over revenues for the same quarter of the previous year. This increase was primarily due to higher unit shipments, offset by a moderate decline in the average selling price. The decline in average selling price was due in part to the new product launch of the m100, an entry-level device with the lowest suggested retail price of any Palm handheld to date. Revenues increased in all geographic areas, with Europe experiencing the highest growth rate. International revenues represented 31% of total revenues in both the first quarter of fiscal 2001 and the first quarter of fiscal 2000. GROSS PROFIT Gross profit was $153.5 million for the first quarter of fiscal 2001, increasing by 96% over the same period in fiscal 2000. Gross profit as a percentage of revenues was 38.3% for the first quarter of fiscal 2001, declining by 6.0 percentage points compared to the first quarter of fiscal 2000. This decline was 14 primarily attributable to a shift in revenue mix towards products with lower average selling prices and lower gross profit margins. In addition, gross profit was impacted by the effect of purchasing certain supply-constrained components at premiums. SALES AND MARKETING Sales and marketing expenses were $76.0 million for the first quarter of fiscal 2001, increasing by 79% compared to the same period in fiscal 2000. Sales and marketing expenses decreased as a percentage of revenues from 24.1% in the first quarter of fiscal 2000 to 19.0% for the same period of fiscal 2001, as expenses were spread over a higher revenue base. The increase in absolute dollars compared to the prior year was due to increased spending on demand generation advertising and marketing programs, headcount and related expenses, and expenses related to the worldwide branding campaign which began in the fourth quarter of fiscal 2000 and continued into the first quarter of fiscal 2001. RESEARCH AND DEVELOPMENT Research and development expenses were $30.3 million for the first quarter of fiscal 2001, increasing by 150% compared to the same period in fiscal 2000. Research and development expenses increased as a percentage of revenue from 6.9% in the first quarter of fiscal 2000 to 7.6% in the first quarter of fiscal 2001. The increases in absolute dollars and as a percentage of revenues compared to the prior year were primarily due to increased spending on headcount and related expenses. These increases were required to support an increasing number of new product introductions, and to expand Palm's development efforts into new product areas such as wireless Internet solutions, platform licensing and web based calendaring. GENERAL AND ADMINISTRATIVE General and administrative expenses were $20.5 million for the first quarter of fiscal 2001, increasing by 186% compared to the same period in fiscal 2000. General and administrative expenses increased as a percentage of revenues from 4.0% in the first quarter of fiscal 2000 to 5.1% in the first quarter of fiscal 2001. The increases in absolute dollars and as a percentage of revenues were primarily due to increased spending for headcount and related expenses, in order to build the infrastructure necessary for a stand-alone public company, particularly in areas such as finance, human resources and legal, while at the same time continuing to pay 3Com for transitional services. AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS Amortization of goodwill and intangible assets was $5.2 million for the first quarter of fiscal 2001, compared to $0.5 million for the same period in fiscal 2000. The increase relates to the amortization of goodwill and other intangible assets resulting from the acquisitions of AnyDay.com and Actual Software which closed in June 2000 and May 2000, respectively. PURCHASED IN-PROCESS TECHNOLOGY Purchased in-process technology for the first quarter of fiscal 2001 relates to the acquisition of AnyDay.com in June 2000. Approximately $0.9 million of the purchase price represented purchased in-process technology that had not yet reached technological feasibility, had no alternative future use and accordingly, was charged to operations. 15 SEPARATION COSTS Separation costs of $1.8 million for the first quarter of fiscal 2001 consist of costs associated with the process of becoming a stand-alone, publicly held company, including consulting and professional fees. We expect to continue to incur separation costs over the remainder of fiscal 2001. INTEREST AND OTHER INCOME (EXPENSE), NET Interest and other income (expense), on a net basis was $13.2 million for the first quarter of fiscal 2001, compared to a nominal amount for the same period in fiscal 2000. Substantially all of the interest income relates to the interest earned on the proceeds of the initial public offering and private placements. We anticipate that interest income is likely to decline from quarter to quarter over the remainder of fiscal 2001, as we make investments in order to execute our strategic plan as an independent public company. INCOME TAX PROVISION The effective tax rate for the first quarter of fiscal 2001 was 46.0%, up from 38.9% for the first quarter of fiscal 2000. Excluding the effect of non-deductible goodwill amortization and purchased in-process technology, the effective tax rate for the first quarter of fiscal 2001 was 40.0%, which represents a slight decrease from the 41.0% effective rate for the full year of fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents at September 1, 2000 were $703.2 million, compared to $1,062.1 million at June 2, 2000. The decrease of $358.9 million was attributable to cash used in operating activities of $55.1 million and cash used in investing activities of $305.7 million, offset by cash provided by financing activities of $1.9 million. Cash used in operating activities consisted of net income, adjusted for non-cash charges and changes in non-cash working capital assets and liabilities. The most significant changes in non-cash working capital assets and liabilities were increases in accounts receivable and prepaid and other current assets, offset partially by increases in accounts payable and other accrued liabilities. Cash used in investing activities of $305.7 million consisted primarily of purchases of short-term investments of $224.4 million, the net impact of the acquisition of AnyDay.com of $67.0 million and purchases of property and equipment of $12.1 million. Cash provided by financing activities of $1.9 million consisted primarily of the proceeds from the issuance of common stock resulting from stock option exercises, offset by the repayment of debt assumed through the acquisition of AnyDay.com. Based on current plans and business conditions, we believe that our existing cash and cash equivalents and short-term investments will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months. Subsequent to quarter-end, we entered into an operating lease agreement related to our new corporate campus, for which occupancy is planned beginning in mid-2002. In conjunction with this agreement, we are required to guarantee a minimum residual value for the property and to maintain certain levels of cash collateral over the term of the agreement. Such cash collateral will be classified as non-current restricted cash in our consolidated balance sheet and totaled approximately $225 million at the inception of the lease agreement. As the leased facilities are constructed the amount of cash collateral required to be maintained is expected to increase to at least $400 million. Palm will continue 16 to receive the interest income earned on the cash collateral. BUSINESS ENVIRONMENT AND RISK FACTORS COMPANY-SPECIFIC TRENDS AND RISKS: RISKS RELATED TO OUR BUSINESS IF WE FAIL TO DEVELOP AND INTRODUCE NEW PRODUCTS AND SERVICES TIMELY AND SUCCESSFULLY, WE WILL NOT BE ABLE TO COMPETE EFFECTIVELY AND OUR ABILITY TO GENERATE REVENUES WILL SUFFER. We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop and introduce new products and services that our customers and end users choose to buy. If we are unsuccessful at developing and introducing new products and services that are appealing to end users, our business and operating results would be negatively impacted because we would not be able to compete effectively and our ability to generate revenues would suffer. The development of new products and services can be very difficult and requires high levels of innovation. The development process is also lengthy and costly. If we fail to anticipate our end users' needs and technological trends accurately or are otherwise unable to complete the development of products and services quickly, we will be unable to introduce new products and services into the market on a timely basis, if at all. For example, we are currently developing Internet services and content such as web-based calendaring and have also announced new handheld device products which will contain wireless communications and expansion capabilities. We cannot assure you that we will be able to introduce these services and products on a timely basis, or that customer demand for these services and products will meet our expectations. Because the sales and marketing life cycle of our handheld solutions is generally 12 to 18 months or less, we must: - - continue to develop updates to our Palm platform, new handheld devices and new Internet services, or our existing products and services will quickly become obsolete; - - manage the timing of new product introductions so that we minimize the impact of customers delaying purchases of existing products in anticipation of new product releases; - - manage the timing of new product introductions to meet seasonal market demands, including the holiday shopping season; - - manage the levels of existing and older product and component inventories to minimize inventory write-offs; and - - adjust the prices of our existing products and services in order to increase or maintain customer demand for these products and services. 17 IF WE DO NOT CORRECTLY ANTICIPATE DEMAND FOR OUR PRODUCTS, WE MAY NOT BE ABLE TO SECURE SUFFICIENT QUANTITIES OR COST-EFFECTIVE PRODUCTION OF OUR HANDHELD DEVICES OR WE COULD HAVE COSTLY EXCESS PRODUCTION OR INVENTORIES. Historically, we have seen steady increases in demand for our products and have generally been able to increase production to meet that demand. However, the demand for our products depends on many factors and is difficult to forecast, in part due to the market for our products being relatively new and currently experiencing high growth rates. As we introduce and support multiple handheld device products and as competition in the market for our products intensifies, we expect that it will become more difficult to forecast demand. Significant unanticipated fluctuations in demand could adversely impact our financial results and cause the following problems in our operations: - - If demand increases beyond what we forecast, we would have to rapidly increase production at our third party manufacturers. We depend on our suppliers to provide additional volumes of components and those suppliers might not be able to increase production rapidly enough to meet unexpected demand. There is the risk that even if we are able to procure enough components, our third party manufacturers might not be able to produce enough of our devices to meet the market demand for our products. The inability of either our manufacturers or our suppliers to increase production rapidly enough could cause us to fail to meet customer demand. - - Rapid increases in production levels to meet unanticipated demand could result in higher costs for manufacturing and supply of components and other expenses. These higher costs could lower our profits. Furthermore, if production is increased rapidly, manufacturing yields could decline, which may also lower our profits. - - If forecasted demand does not develop, we could have excess production resulting in higher inventories of finished products and components, which would use cash and could lead to write-offs of some or all of the excess inventories. Lower than forecasted demand could also result in excess manufacturing capacity at our third party manufacturers and failure to meet some minimum purchase commitments, each of which could result in lower margins. OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY, AND IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR SHARE PRICE MAY DECREASE SIGNIFICANTLY. Our operating results are difficult to predict. Our future quarterly operating results may fluctuate significantly and may not meet our expectations or those of securities analysts or investors. If this occurs, the price of our stock would likely decline. Factors that may cause fluctuations in our operating results include the following: - - Seasonality. Historically, our revenues have usually been weaker in the first and third quarters of each fiscal year and have, from time to time, been lower than the preceding quarter. This seasonality is due to the fact that our devices are highly consumer-oriented, and consumer buying is traditionally lower in these quarters. In addition, we attempt to time our new product releases to coincide with 18 relatively higher consumer spending in the second and fourth fiscal quarters, which contributes to these seasonal variations. - - Increases in Operating Expenses. As we expand our operations, we expect that our operating expenses, particularly our sales, marketing and research and development costs, will continue to increase. We also expect to make significant expenditures to expand our Internet solutions and services. If revenues decrease and we are unable to reduce our costs rapidly enough, our operating results would be negatively affected. In addition, we are adding costs to continue building an independent business and administration infrastructure following our separation from 3Com. - - Revenue Mix. Our profit margins differ among the handheld device, Palm platform licensing and Internet services parts of our business. In addition, the product mix and sales prices of our device products affects profit margins in any particular quarter. As our business evolves and the mix of revenues from devices, licenses and services varies from quarter to quarter, our operating results will likely fluctuate. For example, increased demand for our licensees' products could negatively impact sales of our handheld devices, which could adversely impact our operating results. - - New Product Introductions. As we introduce new products and services, the timing of these introductions will affect our quarterly operating results. We may have difficulty predicting the timing of new product and service introductions and the user acceptance of these new products and services. If products and services are introduced earlier or later than anticipated, or if user acceptance is unexpectedly high or low, our quarterly operating results may fluctuate unexpectedly. In addition, we typically increase sales and marketing expenses to support new product introductions. - - Quarterly Linearity of Revenues. In the last quarter, we recorded approximately 50% of our revenues in the last five weeks of the quarter due to the timing of new product introductions and the availability of components. Shipping a high percentage of our quarterly revenue near the end of the quarter subjects us to risks such as unexpected disruptions in component availability, manufacturing, order management, information systems and shipping. If a significant disruption occurs, our results of operations or financial condition could be adversely affected. - - Use of Purchase Orders with Customers. We rely on one-time purchase orders rather than long-term contracts with our customers. Because we cannot predict with certainty incoming purchase orders, decreases in orders or failure to fulfill orders may cause our operating results to fluctuate. WE RELY ON THIRD PARTY MANUFACTURERS TO PRODUCE OUR HANDHELD DEVICES, AND OUR REPUTATION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY OUR INABILITY TO CONTROL THEIR OPERATIONS. We outsource all of our manufacturing to Manufacturers' Services Limited and Flextronics. We depend on these third party manufacturers to produce sufficient volume of our products in a timely fashion and at satisfactory quality levels. If our third party manufacturers fail to produce quality products on time and in sufficient quantities, our reputation and results of operations would suffer. We depend on Flextronics to manufacture some of our device products at its facilities in Mexico, California, Malaysia and Hungary, and the rest of our device products are manufactured by Manufacturers' Services Limited at its Utah facility. The cost, quality and availability of third party manufacturing operations are essential to the successful production and sale of our handheld devices. Our reliance on third parties exposes us to the following risks outside our control: 19 - - unexpected increases in manufacturing costs; - - interruptions in shipments if one of our manufacturers is unable to complete production; - - inability to control quality of finished device products; - - inability to control delivery schedules; - - unpredictability of manufacturing yield; - - potential lack of adequate capacity; and - - potential inability to secure adequate volumes of components. We believe that both Manufacturers' Service Limited and Flextronics are currently experiencing significant growth due in part to acquisitions of additional manufacturing facilities. This may present challenges to effectively integrate these new facilities. Operational challenges at Manufacturers' Service Limited or Flextronics could impact their ability to meet our manufacturing requirements, which could have a material adverse effect on our results of operations. We do not have a manufacturing agreement with Flextronics, upon whom we rely to manufacture a significant number of our device products. We presently order our products on a purchase order basis from Flextronics. The absence of a manufacturing agreement means that, with little or no notice, Flextronics could refuse to continue to manufacture all or some of the units of our devices that we require or change the terms under which it manufactures our device products. If Flextronics were to stop manufacturing our devices, we may be unable to replace the lost manufacturing capacity on a timely basis and our results of operations could be harmed. In addition, if Flextronics were to change the terms under which they manufacture for us, our manufacturing costs could increase and our profitability could suffer. WE DEPEND ON OUR SUPPLIERS, MANY OF WHICH ARE THE SOLE SOURCE FOR OUR COMPONENTS, AND OUR PRODUCTION WOULD BE SERIOUSLY HARMED IF THESE SUPPLIERS ARE NOT ABLE TO MEET OUR DEMAND AND ALTERNATIVE SOURCES ARE NOT AVAILABLE. Our products contain components, including liquid crystal displays, touch panels, memory chips and microprocessors, that are procured from a variety of suppliers. The cost, quality and availability of components are essential to the successful production and sale of our device products. Recently, including during the fourth quarter of fiscal 2000 and the first quarter of fiscal 2001, we have experienced shortages of certain key components, including liquid crystal displays and related components, flash memory chips and dynamic random access memory (DRAM) chips. A number of our suppliers are capacity constrained, due to high industry demand for their components and relatively long lead times required to expand factory capacity. In addition, recently our ability to obtain certain radio frequency integrated circuits has been adversely impacted, due in part to a fire which occurred at one of the manufacturing facilities used by one of our suppliers. Shortages of these radio frequency integrated circuits will impact our ability to produce Palm VIIx devices. In addition, reduced sales of these Palm VIIx devices is likely to limit the growth rate of our Palm.Net service revenues. 20 Some components, such as displays, power supply integrated circuits, digital signal processors, microprocessors, crystals and several radio frequency and discrete components, come from sole or single source suppliers. Alternative sources are not currently available for these sole and single source components. If suppliers are unable or unwilling to meet our demand for sole source components and if we are unable to obtain an alternative source or if the price for an alternative source is prohibitive, our ability to maintain timely and cost-effective production of our handheld computing device products would be seriously harmed. In addition, because we rely primarily on one-time purchase orders with our suppliers, including our sole and single source suppliers, we cannot predict with certainty our ability to procure components if the demand for our products exceeds our forecast. If the shortages of liquid crystal displays and related components and flash memory chips or any other key component persists or worsens, we will likely not be able to deliver sufficient quantities of our products to satisfy demand. This could result in quarterly fluctuations in operating results and could result in market share loss to competitors who are able to supply sufficient quantities of their products to meet demand. In addition our costs to purchase these components would increase, which would lower our profits. WE USE THIRD PARTIES TO PROVIDE SIGNIFICANT OPERATIONAL AND ADMINISTRATIVE SERVICES, AND OUR ABILITY TO SATISFY OUR CUSTOMERS AND OPERATE OUR BUSINESS WILL SUFFER IF THE LEVEL OF SERVICES DOES NOT MEET OUR REQUIREMENTS. We use third parties to provide services such as customer service, product distribution, data center operations and desktop support, and facilities services. Should any of these third parties fail to deliver an adequate level of service, our business could suffer. WE DO NOT KNOW IF THE PALM PLATFORM LICENSING AND INTERNET SERVICES PARTS OF OUR BUSINESS WILL BE ABLE TO GENERATE SIGNIFICANT REVENUE IN THE FUTURE, AND WE WILL CONTINUE TO RELY ON OUR HANDHELD DEVICE PRODUCTS AS THE PRIMARY SOURCE OF OUR REVENUE FOR THE FORESEEABLE FUTURE. Our future growth and a significant portion of our future revenue depend on the commercial success of our Palm handheld devices, which comprise the primary product line that we currently offer. We expanded our Palm platform licensing and Internet services parts of our business only recently, and these parts of our business have generated a small percentage of our revenues. If revenues from our device business do not grow, our other business activities may not be able to compensate for this shortfall. A SIGNIFICANT PORTION OF OUR REVENUES CURRENTLY COMES FROM A SMALL NUMBER OF DISTRIBUTORS, AND ANY DECREASE IN REVENUES FROM THESE DISTRIBUTORS COULD HARM OUR RESULTS OF OPERATIONS. A significant portion of our revenues comes from only a small number of distributors. For example, Ingram Micro and Tech Data represented approximately 22% and 8%, respectively, of our revenues in the quarter ended September 1, 2000. We expect that the majority of our revenues will continue to depend on sales of our handheld devices to a small number of distributors. Any downturn in the business of these customers could seriously harm our revenues and results of operations. 21 WE RELY ON DISTRIBUTORS, RETAILERS AND RESELLERS TO SELL OUR PRODUCTS, AND DISRUPTIONS TO THESE CHANNELS WOULD ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUES FROM THE SALE OF OUR HANDHELD DEVICES. Because we sell a significant portion of our products to distributors, retailers and traditional and Internet based resellers, we are subject to many risks, including risks related to their inventory levels and support for our products. Historically, our distributors, retailers and resellers have maintained significant levels of our products in their inventories. However, in both the fourth quarter of fiscal 2000 and the first quarter of fiscal 2001, we were generally unable to fully meet the demand for our products from our distributors, retailers and resellers. If we are unable to supply our distributors, retailers and resellers with sufficient levels of inventory to meet customer demand, our sales could be negatively impacted. Our distributors, retailers and resellers also sell products offered by our competitors. As previously discussed, for the past two quarters we have generally been unable to fully meet the demand for our products based on orders placed by our distributors, retailers and resellers. If our competitors offer our distributors, retailers and resellers more favorable terms or have more products available to meet their needs, those distributors, retailers and resellers may de-emphasize or decline to carry our products or carry our competitors' products instead. In the future, we may not be able to retain or attract a sufficient number of qualified distributors, retailers and resellers. Further, distributors, retailers and resellers may not recommend, or continue to recommend, our products. If we are unable to maintain successful relationships with distributors, retailers and resellers or to expand our distribution channels, our business will suffer. If we reduce the prices of our products to our distributors, retailers and resellers, we may have to compensate them for the difference between the higher price they paid to buy their inventory and the new lower prices. In addition, like other manufacturers, we are exposed to the risk of product returns from distributors, either through their exercise of contractual return rights or as a result of our strategic interest in assisting distributors in balancing inventories. We believe our distributors, retailers and traditional resellers are experiencing intense competition from Internet-based suppliers that distribute directly to end-user customers, and that competition among Internet-based suppliers is also intense. We also sell our products directly to end-user customers from our Palm.com web site. These actions could cause conflict among our channels of distribution, which could seriously harm our revenues and results of operations. IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS, OUR RESULTING LOSS OF COMPETITIVE POSITION COULD RESULT IN PRICE REDUCTIONS, FEWER CUSTOMER ORDERS, REDUCED MARGINS AND LOSS OF MARKET SHARE. We compete in the handheld device, operating system software and Internet services markets. The markets for these products and services are highly competitive and we expect competition to increase in the future. Some of our competitors or potential competitors have significantly greater financial, 22 technical and marketing resources than we do. These competitors may be able to respond more rapidly than Palm to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do. - - Our handheld computing device products compete with a variety of smart handheld devices, including keyboard-based devices, sub-notebook computers, smart phones and two-way pagers. Our principal competitors include Casio, Compaq, Hewlett-Packard, Psion, Research in Motion Limited (RIM), Sharp and Palm platform licensees such as Handspring, Sony and TRG. - - Our Palm platform competes primarily with operating systems such as Microsoft's Windows CE for palm-sized personal computers (Pocket PC) and Symbian's EPOC for wireless devices. Licensees of our Palm platform are under no obligation to introduce new products based on our operating system, and may elect to use an alternative operating system, in which case we may not be able to increase our revenue from licensing the Palm platform, or expand the proliferation of the Palm economy. - - Our Internet services compete with a variety of alternative technologies and services, such as those based on different industry standards for wireless Internet access, information appliances that provide Internet connectivity and other traditional and developing methods. Competitors to our wireless Internet services include RIM and Omnisky. Our subscription-model access business also competes indirectly with other providers of Internet access, ranging from dedicated Internet service providers such as America Online and Earthlink to local phone companies. We expect our competitors to continue to improve the performance of their current products and services and to introduce new products, services and technologies. For example, in the first half of calendar 2000, Microsoft introduced a new version of its Windows CE operating system. We believe that Microsoft is investing aggressively to assist its licensees in marketing the Pocket PC line of handheld computers based on this new version of the Windows CE operating system. Successful new product introductions or enhancements by our competitors, or increased market acceptance of competing products, such as the Pocket PC and RIM devices or devices offered by our licensees, such as Handspring and Sony, could reduce the sales and market acceptance of our products and services, cause intense price competition or make our products obsolete. To be competitive, we must continue to invest significant resources in research and development, sales and marketing and customer support. We cannot be sure that we will have sufficient resources to make these investments or that we will be able to make the technological advances necessary to be competitive. Increased competition could result in price reductions, fewer customer orders, reduced margins and loss of market share. Our failure to compete successfully against current or future competitors could seriously harm our business, financial condition and results of operations. IF WE FAIL TO EFFECTIVELY RESPOND TO COMPETITION FROM PRODUCTS INTRODUCED BY LICENSEES OF OUR PALM PLATFORM OR IF OUR LICENSEES FAIL TO SELL PRODUCTS BASED ON THE PALM PLATFORM, OUR RESULTS OF OPERATIONS MAY SUFFER AS THE REVENUES WE RECEIVE FROM LICENSE FEES MAY NOT COMPENSATE FOR THE LOSS OF REVENUES FROM OUR DEVICE PRODUCTS. The success of our business depends on both the sale of handheld device products and the licensing of 23 our Palm platform. However, licensees of our Palm platform offer products that compete directly or indirectly with our handheld computing devices. For example, licensees such as Handspring and Sony use our Palm platform in products that can compete with our handheld devices. In addition, our Palm platform has been licensed by other manufacturers such as Nokia and Kyocera for use in devices such as mobile phones or other similar products that can compete indirectly with our handheld devices. If revenues from our handheld devices suffer because of competition from licensees of our Palm platform, our results of operations would suffer and our ability to implement our business model would be seriously challenged. In addition, our licensees may not be successful in selling products based on the Palm platform, which could harm our business and results of operations. DEMAND FOR OUR PRODUCTS IS PARTIALLY DEPENDENT UPON SUPPORT FROM THIRD PARTY SOFTWARE AND HARDWARE DEVELOPERS. Decisions by customers to purchase our handheld device products, as opposed to competitive product offerings, are sometimes based on the availability of third party software, hardware and other expansion capabilties. In the future, we believe that the level of support from third party developers in developing products which provide expansion capabilities to handheld devices will become increasingly important. For example, Handspring's line of Visor products feature a hardware expansion slot. While we believe that our products compete favorably with respect to expansion capabilities, our operating results could be adversely impacted if third party developers focus their efforts on developing products that provide expansion capabilities to competitive product offerings. OUR PALM PLATFORM AND HANDHELD DEVICES MAY CONTAIN ERRORS OR DEFECTS, WHICH COULD RESULT IN THE REJECTION OF OUR PRODUCTS AND DAMAGE TO OUR REPUTATION, AS WELL AS LOST REVENUES, DIVERTED DEVELOPMENT RESOURCES AND INCREASED SERVICE COSTS AND WARRANTY CLAIMS. Our Palm platform and our devices are complex and must meet stringent user requirements. We must develop our software and hardware products quickly to keep pace with the rapidly changing handheld device market. Products and services as sophisticated as ours are likely to contain undetected errors or defects, especially when first introduced or when new models or versions are released. We have in the past experienced delays in releasing some models and versions of our products until problems were corrected. Our products may not be free from errors or defects after commercial shipments have begun, which could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources and increased customer service and support costs and warranty claims. Any of these results could harm our business. For instance, we recently experienced increased support costs related to a faulty memory component used in a limited number of our handheld devices, which required us to develop a software patch to address the problem. Recently, there have been reports of computer viruses impacting handheld device operating systems. Viruses and publicity about them may adversely impact sales of our products. In particular, if anti-virus protection which users deem to be adequate is not developed to combat these viruses, this could have a material adverse effect on our business, both in our device business as well as the Internet services and solutions part of our business. 24 IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS, WHICH COULD CAUSE US TO FAIL TO MEET OUR CUSTOMER DEMAND OR TO ATTRACT NEW CUSTOMERS. Our ability to successfully offer our products and implement our business plan in a rapidly evolving market requires an effective planning and management process. We continue to increase the scope of our operations domestically and internationally and have grown our shipments and headcount substantially. At December 31, 1999, we had a total of approximately 652 employees. At September 1, 2000 we had a total of approximately 1,188 employees. In addition, we plan to continue to hire a significant number of employees this year. This growth has placed, and our anticipated growth in future operations will continue to place, a significant strain on our management systems and resources and increase our expenses. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures. While we have implemented stand-alone versions of most of the transaction processing systems historically used by 3Com, we intend to implement new systems over the next 3-12 months that more closely match our business needs and to incur significant additional expenses in connection with those systems. In addition, we will need to continue to expand, train and manage our work force worldwide. We recently acquired two companies, and may make additional strategic acquisitions in the future. Acquisitions will make it more difficult to effectively manage our growth, due to a number of factors including the addition of new employees, the expansion of our operations into new geographic areas and the increased geographic dispersion of our personnel, and the expansion of our product and service offerings. If we are not able to successfully integrate acquired companies into our business, our results of operations could be adversely impacted. THE MARKET FOR THE DELIVERY OF INTERNET SERVICES THROUGH HANDHELD DEVICES IS NEW AND RAPIDLY EVOLVING, AND OUR BUSINESS AND OUR ABILITY TO GENERATE REVENUES FROM OUR HANDHELD DEVICES, PALM PLATFORM OR INTERNET SERVICES COULD SUFFER IF THIS MARKET DOES NOT DEVELOP OR WE FAIL TO ADDRESS THIS MARKET EFFECTIVELY. The market for the delivery of Internet services through handheld devices is new and rapidly evolving. In addition, our Internet services strategy has been developed only recently, and we must continue to adapt it to compete in the rapidly evolving Internet services market. We currently offer our Palm.Net service, a subscription-based wireless access service that enables users of the Palm VII family of handhelds to access web-clipped content on the Internet. We are currently developing additional functionality for our Internet services and solutions. Other competitors have introduced or developed, or are in the process of introducing or developing competing Internet services accessible through a variety of handheld devices and other information appliances. We cannot assure you that there will be demand for the Internet services provided by us or that individuals will widely adopt our handheld devices as a means of accessing Internet services. Accordingly, it is extremely difficult to predict which products and services will be successful in this market or the future size and growth of this market. In addition, given the limited history and rapidly evolving nature of this market, we cannot predict the price that 25 wireless subscribers will be willing to pay for these products and services. If acceptance of our Internet services and solutions is less than anticipated, our ability to expand our business could be impacted. In addition, our ability to produce Palm VIIx devices is currently constrained, thereby limiting the growth of new subscribers to our Palm.Net services. WE MAY NOT BE ABLE TO DELIVER INTERNET ACCESS IF OUR WIRELESS CARRIER RAISES ITS RATES, DISCONTINUES DOING BUSINESS WITH US OR DOES NOT DELIVER ACCEPTABLE SERVICE. The future success of our Internet services business substantially depends on the capacity, affordability, reliability and security of our wireless networks. Only a small number of wireless providers offer the network services we require. We currently rely on BellSouth Wireless Data to provide all of our Palm VII and Palm VIIx handheld wireless network services pursuant to an agreement. Our agreement with BellSouth permits each party to terminate the agreement on an annual basis. If BellSouth failed to provide us with service at rates acceptable to us or at all, we may not be able to provide Internet access to our users. In addition, our Palm VII series of products are configured around the frequency standard used by BellSouth. If we needed to switch to another wireless carrier, we would have to redesign significant portions of our software and hardware to permit transmission on a different frequency. Users of Palm VII series products existing before the redesign would not be able to access the service provided by the new wireless carrier. If we were required to redesign these elements, our business could be adversely affected. If BellSouth delivers unacceptable service, the quality of our Internet services would suffer and we would likely lose users who are dissatisfied with our service. For example, we are aware that BellSouth, like other wireless carriers, has experienced service outages from time to time in their wireless data network. WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND OUR WIRELESS INTERNET SERVICES INTO INTERNATIONAL MARKETS. BellSouth provides wireless data services only in the United States. We intend to expand our network services to support Internet services internationally, but doing so will require us to enter into new relationships with wireless providers abroad. We may not be able to enter into relationships with international wireless carriers which are on favorable terms to us. In addition, because many international wireless carriers use different standards and transmit data on different frequencies than BellSouth, we are likely to incur incremental expenses related to the redesign of significant portions of our software and hardware. Furthermore, our products may be subject to a lengthy certification process with each wireless carrier with whom we seek to enter into a relationship. These certification requirements could delay or otherwise negatively impact our strategy of expanding our wireless Internet services into international markets. OUR REPUTATION AND ABILITY TO GENERATE REVENUES WILL BE HARMED IF DEMAND FOR OUR INTERNET SERVICES EXCEEDS OUR TELECOMMUNICATIONS AND NETWORK CAPACITY. We may from time to time experience increases in our Internet services usage which exceed our 26 available telecommunications capacity and the capacity of our third party network servers. As a result, users may be unable to register or log on to our service, may experience a general slow-down in their Internet access or may be disconnected from their sessions. Excessive user demand could also result in system failures of our third party network servers' networks. Inaccessibility, interruptions or other limitations on the ability to access our service due to excessive user demand, or any failure of our third party network servers to handle user traffic, would have a material adverse effect on our reputation and our revenues. WE PLAN TO EXPAND OUR DIRECT E-COMMERCE OPERATION, AND OUR ABILITY TO GENERATE REVENUES FROM OUR INTERNET SERVICES COULD BE HARMED IF THIS OPERATION IS NOT SUCCESSFUL. We may not be able to achieve any or all of the necessary components of a successful e-commerce operation. We intend to expand our Palm.com and Palm.net websites. This expansion will require additional expenditures. We have little experience in implementing or operating a direct e-commerce business, and if we are not successful in operating it or in successfully managing our current sales channels alongside our direct e-commerce channel, our operating results could be adversely affected. IF THE SECURITY OF OUR WEBSITES IS COMPROMISED, OUR REPUTATION COULD SUFFER AND CUSTOMERS MAY NOT BE WILLING TO USE OUR INTERNET SERVICES, WHICH COULD CAUSE OUR REVENUES TO DECLINE. A significant barrier to widespread use of electronic commerce sites, such as our Palm.com site, and network services sites, such as our Palm.net site, is concern for the security of confidential information transmitted over public networks. Despite our efforts to protect the integrity of our Palm.com and Palm.net sites, a party may be able to circumvent our security measures and could misappropriate proprietary information or cause interruptions in our operations and damage our reputation. Any such action could negatively affect our customers' willingness to engage in online commerce with us. We may be required to expend significant capital and other resources to protect against these security breaches or to alleviate problems caused by these breaches. WE MAY NOT BE ABLE TO MAINTAIN AND EXPAND OUR BUSINESS IF WE ARE NOT ABLE TO HIRE, RETAIN AND INTEGRATE SUFFICIENT QUALIFIED PERSONNEL. Our future success depends to a significant extent on the continued contribution of our key executive, technical, sales, marketing, supply chain and administrative personnel. It also depends on our ability to expand, integrate and retain our management team. The loss of services of key employees could adversely affect our business, operating results or financial condition. Many members of our senior management have been with the business only a short time. In addition, recruiting and retaining skilled personnel, including software and hardware engineers, is highly competitive, particularly in the San Francisco Bay Area where we are headquartered. If we fail to retain, hire and integrate qualified employees and contractors, we will not be able to maintain and expand our business. In addition, we must carefully balance the growth of our employees commensurate with our anticipated revenue growth. 27 If our revenue growth or attrition levels vary significantly, our results of operations or financial condition could be adversely affected. Further, our common stock price has been, and may continue to be extremely volatile. When our common stock price is less than the exercise price of stock options granted to employees, turnover is likely to increase, which could adversely affect our results of operations or financial condition. THIRD PARTIES HAVE CLAIMED AND MAY CLAIM IN THE FUTURE WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, AND WE COULD SUFFER SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROM SELLING PRODUCTS IF THESE CLAIMS ARE SUCCESSFUL. In the course of our business, we frequently receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses or cross-licenses to incorporate or use the proprietary technologies in our products. Third parties may claim that we or our customers or Palm platform licensees are infringing their intellectual property rights, and we may be found to infringe those intellectual property rights and require a license to use those rights. We may be unaware of intellectual property rights of others that may cover some of our technology, products and services. For a description of pending lawsuits involving claims that we are infringing a third party's intellectual property, refer to Part II--Item 1--Legal Proceedings of this Report on Form 10-Q. Any litigation regarding patents or other intellectual property could be costly and time-consuming, and divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements or indemnify our Palm platform licensees. However, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of our products. We often rely on licenses of intellectual property for use in our business. We cannot assure you that these licenses will be available in the future on favorable terms or at all. IF THIRD PARTIES INFRINGE OUR INTELLECTUAL PROPERTY, WE MAY EXPEND SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY. Our success depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks and trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our operating results. Our pending patent and trademark registration applications may not be allowed or competitors may 28 challenge the validity or scope of these patent applications or trademark registrations. In addition, our patents may not provide us a significant competitive advantage. We may be required to spend significant resources to monitor and police our intellectual property rights. We may not be able to detect infringement and may lose competitive position in the market before we do so. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market share. In the past, there have been thefts of computer equipment from us and our employees. This computer equipment has contained proprietary information. We have formulated a security plan to reduce the risk of any future thefts and have cooperated with state and federal law enforcement officials in an investigation of past incidents. We may not be successful in preventing future thefts, or in preventing those responsible for past thefts from using our technology to produce competing products. The unauthorized use of Palm technology by competitors could have a material adverse effect on our ability to sell our products in some markets. OUR FUTURE RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS. Since we sell our products worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenue from international operations will represent an increasing portion of our total revenue. In addition, several of the facilities where our devices are manufactured are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including: - - changes in foreign currency exchange rates; - - changes in a specific country's or region's political or economic conditions, particularly in emerging markets; - - trade protection measures and import or export licensing requirements; - - potentially negative consequences from changes in tax laws; - - difficulty in managing widespread sales and manufacturing operations; and - - less effective protection of intellectual property. For example, several companies have recently reported decreased demand from European customers, which they have attributed to unfavorable exchange rate fluctuations and higher oil prices. Although substantially all of our revenues are denominated in U.S. dollars, we are subject to changes in demand for our products resulting from exchange rate fluctuations that make our products relatively more or less expensive in international markets. If exchange rate fluctuations occur, such as the recent decline of the 29 Euro relative to the US dollar, our business could be negatively impacted by decreases in demand for our products or reductions in gross margins. Notwithstanding the recent exchange rate fluctuations, in the first quarter of fiscal 2001 our European customers requested more products than we supplied. WE INTEND TO PURSUE STRATEGIC ACQUISITIONS AND INVESTMENTS WHICH COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS IF UNSUCCESSFUL. We recently acquired Actual Software and Anyday.com. We often evaluate other acquisition opportunities that could provide us with additional product or services offerings or additional industry expertise. Acquisitions could result in difficulties assimilating acquired operations and products, and result in the diversion of capital and management's attention away from other business issues and opportunities. Integration of acquired companies may result in problems related to integration of technology and inexperienced management teams. Our management has had limited experience in assimilating acquired organizations and products into our operations. We may not successfully integrate any operations, personnel or products that we have acquired or may acquire in the future. If we fail to successfully integrate acquisitions, our business could be materially harmed. In addition, we have recently designated up to $50 million for strategic investments in other companies which provide products and services which are complementary to ours. If these investments are unsuccessful, this could have a material adverse impact on our results of operations and financial position. OUR ABILITY TO PURSUE MERGERS AND ACQUISITIONS MAY BE LIMITED. 3Com has obtained a ruling from the Internal Revenue Service that the distribution of 3Com's shares of Palm common stock to 3Com's stockholders will be not be taxable. Such ruling requires 3Com and Palm, through July 27, 2002, not to engage in certain transactions that would constitute a change of more than 50% of the equity interest in either company. Consequently, our ability to engage in mergers and acquisitions will be limited by this requirement. If either 3Com or Palm fail to conform to requirements set forth in the ruling, there would be material adverse consequences, potentially including making the distribution taxable, and causing the company which was responsible for such non-conformance to indemnify the other company for any resulting damages. WE CANNOT PREDICT THE IMPACT OF RECENT ACTIONS AND COMMENTS BY THE SEC AND FASB Recent actions and comments from the SEC have focused on the integrity of financial reporting. In addition, the FASB and other regulatory accounting agencies have recently introduced several new or proposed accounting standards, some of which represent a significant change from current industry practices. For example, In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements of all public registrants. In response to numerous requests for interpretive guidance of SAB 101, the effective date of the standard has been delayed twice. We currently expect SAB 101 to become effective during fiscal 2001. Depending on the 30 final interpretation of the standard, the adoption of SAB 101 may have a material effect on our reported revenues and results of operations for any particular quarter. However, we believe that the impact of SAB 101 will not have a material effect on the underlying strength or weakness of our business operations as measured by the dollar value of our product shipments and cash flows. RISKS RELATED TO OUR SEPARATION FROM 3COM BECAUSE WE CURRENTLY USE PORTIONS OF 3COM'S NETWORK INFRASTRUCTURE, REAL ESTATE FACILITIES, AND RELATED SITE SERVICES, OUR ABILITY TO OPERATE OUR BUSINESS COULD BE IMPACTED BY DISRUPTIONS IN SERVICE LEVELS FROM 3COM. We continue to rely upon the network infrastructure and certain other systems provided and maintained by 3Com. We are in the process of migrating to our own network infrastructure which we intend to outsource to a third party. We may experience network interruptions related to either the current 3Com network infrastructure or the migration to our new network infrastructure maintained by a third party. Any failure or significant downtime in 3Com's or our own network or information systems could prevent us from taking customer orders, shipping products or billing customers and could harm our business. In addition, our network and information systems require the services of employees with extensive knowledge of these information systems and the business environment in which we operate. In order to successfully implement and operate our systems, we must be able to attract and retain a significant number of highly skilled employees. If we fail to attract and retain the highly skilled personnel required to implement, maintain, and operate our information systems, our business could suffer. In addition, we currently lease office space from 3Com in Santa Clara and other locations. We have entered into arrangements with 3Com to lease our Santa Clara facilities under a lease that is terminable with six months notice beginning in July 2001 and expires in February 2003. After this transition period, we will need to secure alternative facilities. We recently announced our intention to build a new campus which we intend to be available in mid 2002. We are currently in the process of locating additional space and negotiating the lease terms to meet our expected facilities requirements until the new campus is available. If we fail to successfully conclude this negotiation process, or fail to find other replacement facilities in a timely fashion, our business will be harmed. The agreements with 3Com for these services and leases were made in the context of a parent-subsidiary relationship and were negotiated in the overall context of our separation from 3Com. The prices charged to us under these agreements may be lower than the prices that we may be required to pay third parties for similar services or the costs of similar services if we undertake them ourselves. OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS A SEPARATE COMPANY. Through February 25, 2000, our consolidated financial statements were carved out from the consolidated 31 financial statements of 3Com using the historical results of operations and historical bases of the assets and liabilities of the 3Com handheld computing business that we comprised. Accordingly, the historical financial information does not necessarily reflect what our financial position, results of operations and cash flows would have been had we been a separate, stand-alone entity during the periods presented. 3Com did not account for us, and we were not operated, as a separate, stand-alone entity for the periods presented. Our historical costs and expenses include allocations from 3Com for centralized corporate services and infrastructure costs, including legal, accounting, treasury, real estate, information technology, distribution, customer service, sales, marketing and engineering. These allocations were determined on bases that 3Com and Palm considered to be reasonable reflections of the utilization of services provided to or the benefit received by Palm. The historical financial information is not necessarily indicative of what our results of operations, financial position and cash flows will be in the future. We have not made adjustments to our historical financial information to reflect the many significant changes that have occurred and will occur in our cost structure, funding and operations as a result of our separation from 3Com, including increased costs associated with reduced economies of scale, increased marketing expenses related to building a company brand identity separate from 3Com and increased costs associated with being a publicly traded, stand-alone company. WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH 3COM WITH RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS AND MAY NOT RESOLVE THESE CONFLICTS ON THE MOST FAVORABLE TERMS TO US. Conflicts of interest may arise between 3Com and us in a number of areas relating to our past and ongoing relationships, including: - - labor, tax, employee benefit, indemnification and other matters arising from our separation from 3Com; - - intellectual property matters; - - employee retention and recruiting; - - the nature, quality and pricing of transitional services 3Com has agreed to provide us; and - - business opportunities that may be attractive to both 3Com and us. Nothing restricts 3Com from competing with us. We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party. The agreements we have entered into with 3Com may be amended upon agreement between the parties. 32 RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK OUR SECURITIES HAVE NOT BEEN PUBLICLY TRADED VERY LONG AND OUR STOCK PRICE MAY BE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND VOLATILITY. Our common stock has been publicly traded only since March 2, 2000. The market price of our common stock has been subject to significant fluctuations since the date of our initial public offering. These fluctuations could continue. Among the factors that could affect our stock price are: - - quarterly variations in our operating results; - - changes in revenue or earnings estimates or publication of research reports by analysts; - - speculation in the press or investment community; - - strategic actions by us or our competitors, such as new product announcements, acquisitions or restructuring; - - actions by institutional stockholders; - - general market conditions; and - - domestic and international economic factors unrelated to our performance. The stock markets in general, and the markets for high technology stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW AND OUR ADOPTION OF A STOCKHOLDER RIGHTS PLAN MAY DELAY OR PREVENT ACQUISITION OF US, WHICH COULD DECREASE THE VALUE OF YOUR SHARES. Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. These provisions include a classified board of directors and limitations on actions by our stockholders by written consent. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Although we believe these provisions provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders. Our board of directors adopted a stockholder rights plan, pursuant to which we will issue a dividend of one right for each share of common stock held by stockholders of record as of November 6, 2000. Unless redeemed by us prior to the time the rights are exercised, upon the occurrence of certain events, the rights will entitle the holders to purchase shares of our preferred stock, or shares of an acquiring entity, equal to twice the exercise price of the right. The issuance of the rights could have the effect of delaying or preventing a change in control of us. 33 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE SENSITIVITY Palm's exposure to market risk for changes in interest rates relates primarily to our investment portfolio, which consists of cash, cash equivalents and short-term investments as of September 1, 2000. The primary objective of our investment activities is to maintain the safety of principal and preserve liquidity while maximizing yields without significantly increasing risk. This is accomplished by investing in marketable investment grade securities and by limiting exposure to any one issuer. We do not use derivative financial instruments in our investment portfolio and due to the nature of our investments, we do not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio. As of September 1, 2000, all investments mature within one year and are carried at amortized cost, which approximates fair market value. Subsequent to quarter-end, we entered into an operating lease agreement related to our new corporate campus, for which occupancy is planned beginning in mid-2002. In conjunction with this agreement, we are required to guarantee a minimum residual value for the property and to maintain certain levels of cash collateral over the term of the agreement. Such cash collateral will be classified as non-current restricted cash in our consolidated balance sheet and totaled approximately $225 million at the inception of the lease agreement. As the leased facilities are constructed the amount of cash collateral required to be maintained is expected to increase to at least $400 million. Palm will continue to receive the interest income earned on the cash collateral. FOREIGN CURRENCY EXCHANGE RATE RISK Prior to our separation from 3Com, our exposure to foreign currency exchange rate risk was managed on an enterprise-wide basis as part of 3Com's risk management strategy. This strategy utilized foreign exchange forward and option contracts to hedge certain balance sheet exposures and intercompany balances against future movements in foreign exchange rates. Having now separated from 3Com, we will manage our exchange rate risk on an independent basis. Currently, substantially all of our revenues are denominated in US dollars. We do not currently and do not intend in the future to utilize derivative financial instruments for trading purposes. 34 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Palm is a party to lawsuits in the normal course of its business. Litigation in general, and intellectual property litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Palm believes that it has defenses to the cases set forth below and is vigorously contesting these matters. Palm is not currently able to estimate the possible loss, or range of loss, if any, from the cases listed below and an unfavorable resolution of these lawsuits could adversely affect Palm's business, results of operations or financial condition. On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics Corporation and U.S. Robotics Access Corp. in the United States District Court for the Western District of New York. The case is now captioned: XEROX CORPORATION v. U.S. ROBOTICS CORPORATION, U.S. ROBOTICS ACCESS CORP., PALM COMPUTING, INC. AND 3COM CORPORATION, Civil Action No. 97-CV-6182T. The complaint alleged willful infringement of U.S. patent 5,596,656 entitled "Unistrokes for Computerized Interpretation of Handwriting." The complaint sought unspecified damages and to permanently enjoin the defendants from infringing the patent in the future. In an Order entered by the District Court on June 6, 2000, the District Court granted the defendants' motion for summary judgment of non-infringement and dismissed the case in its entirety. On July 5, 2000, Xerox filed a Notice of Appeal of the dismissal with the U.S. Court of Appeals for the Federal Circuit. On July 22, 1999, Palm filed a copyright infringement action against Olivetti and CompanionLink in the United States District Court for the Northern District of California and obtained a preliminary injunction against further distribution, sale, import or export of Olivetti Office USA's "Royal daVinci" handheld device and the daVinci OS Software Development Kit (distributed by CompanionLink Software, Inc.), which contained source code copied from the Palm OS operating system. The injunction is to remain in effect pending the outcome of the lawsuit. Palm also initiated a copyright infringement action in Hong Kong on July 21, 1999, against EchoLink Design Ltd., the company responsible for developing the operating system software contained in the daVinci products. The High Court of the Hong Kong Special Administrative Region issued an order the same day restraining EchoLink from further copying, distribution, sale, import or export of Palm OS operating system source code or EchoLink's "NEXUS OS" source code, which Palm maintains infringes its copyrights. On October 7, 1999, 3Com notified certain third-party retailers about the preliminary injunction order cited above. Olivetti has filed a motion seeking leave to assert counterclaims against Palm and 3Com for unfair competition, intentional interference with potential economic advantage, libel and trade libel, based upon certain statements that were allegedly made, or that 3Com allegedly omitted to make, in the October 7, 1999 letter. On December 13, 1999, WaveWare Communications, Inc. filed suit against 3Com, Palm and others in the Superior Court of California, San Mateo County. The case is captioned WAVEWARE COMMUNICATIONS, INC. v. 3COM CORPORATION, PALM COMPUTING, INC., AND MARK BERCOW, No. 411331. The complaint alleges breach of contract, constructive fraud, fraud and deceit, negligent misrepresentation, misappropriation of assets and trade secrets, unfair competition, unjust enrichment and intentional interference with economic advantage in connection with our and 3Com's discussions with WaveWare concerning WaveWare's potential acquisition by 3Com. The complaint seeks unspecified monetary damages and injunctive relief. Discovery is ongoing and the case is set for trial in January 2001. On December 27, 1999, Telxon Corporation and Penright! Corporation filed a complaint in the U.S. District Court for the Northern District of Ohio, Eastern Division (Case No. 1:99CV3157) against 3Com 35 and Palm alleging copyright infringement, unfair competition and theft of trade secrets. In an Order dated July 31, 2000, the Federal Judge assigned to the action transferred the case to the U.S. District Court for the Northern District of California. The case is now captioned TELXON CORPORATION V. 3COM INC. (CASE NO. C00-02885 CRB). The plaintiffs allege that the Palm OS operating system contains graphical user interface software copied from the plaintiffs' software. The complaint seeks unspecified compensatory and treble damages and to enjoin, among other things, distribution and sales of the Palm OS operating system. No trial date has been set. The case is still in the early stages of discovery. On February 28, 2000, E-Pass Technologies, Inc. filed suit against "3Com, Inc." in the United States District Court for the Southern District of New York and later filed on March 6, 2000 an Amended Complaint against Palm and 3Com. In an Order dated June 9, 2000, the Federal Judge assigned to the action transferred the case to the U.S. District Court for the Northern District of California. The case is now captioned E-PASS TECHNOLOGIES, INC. V. 3COM CORPORATION, A/K/A 3COM, INC. AND PALM, INC. (Case No. C00 2255-DLH ADR). The Amended Complaint alleges willful infringement of U.S. patent 5,276,311 entitled "Method and Device for Simplifying the Use of Credit Cards, or the Like." The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patent in the future. Palm is in the preliminary stages of investigating the allegations contained in the suit. No trial date has been set. The case is still in the early stages of discovery. On May 2, 2000, Rotis Technologies Corporation filed suit against Palm and two other defendants in the U.S. District Court for the Northern District of Texas. The case is now captioned ROTIS TECHNOLOGIES CORPORATION V. TRACK DATA CORPORATION, PALM, INC. AND SPRINT SPECTRUM L.P. (Case No. 300CV-931-L). The complaint alleges infringement of U.S. patent 4,473,824 entitled "Price Quotation System." The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patent in the future. Palm is in the preliminary stages of investigating the allegations contained in the suit. No trial date has been set. The case is still in the early stages of discovery. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibit Number Description ------- ----------- 2.1(1) Master Separation and Distribution Agreement between 3Com and the registrant effective as of December 13, 1999, as amended. 2.2(2) General Assignment and Assumption Agreement between 3Com and the registrant, as amended. 2.3(2) Master Technology Ownership and License Agreement between 3Com and the registrant. 2.4(2) Master Patent Ownership and License Agreement between 3Com and the registrant. 2.5(2) Master Trademark Ownership and License Agreement between 3Com and the registrant. 2.6(2) Employee Matters Agreement between 3Com and the registrant. 2.7(2) Tax Sharing Agreement between 3Com and the registrant. 36 2.8(2) Master Transitional Services Agreement between 3Com and the registrant. 2.9(2) Real Estate Matters Agreement between 3Com and the registrant. 2.10(2) Master Confidential Disclosure Agreement between 3Com and the registrant. 2.11(2) Indemnification and Insurance Matters Agreement between 3Com and the registrant. 2.12(1) Form of Non-U.S. Plan. 3.1 (1) Amended and Restated Certificate of Incorporation. 3.2 (1) Bylaws. 4.1 (1) Reference is made to Exhibits 3.1 and 3.2 hereof. 4.2 (1) Specimen Stock Certificate. 10.1(1)* 1999 Stock Plan. 10.2(1)* Form of 1999 Stock Plan Agreements. 10.3(1)* 1999 Employee Stock Purchase Plan. 10.4(1)* Form of 1999 Employee Stock Purchase Plan Agreements. 10.5(3)* Amended and Restated 1999 Director Option Plan 10.6(1)* Form of 1999 Director Option Plan Agreements. 10.7(1)* Management Retention Agreement dated as of December 1, 1999 by and between Carl J. Yankowski and the registrant. 10.8(1)* Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers. 10.9(1)** RAM Mobile Data USA Limited Partnership Value Added Reseller Agreement between RAM Mobile Data USA Limited Partnership (now BellSouth Wireless Data, L.P.) and the registrant. 10.10(1)** Supply Agreement between Manufacturers' Services Salt Lake City Operations, Inc. and the registrant. 10.11(1) Common Stock Purchase Agreement between America Online and the registrant. 10.12(1) Common Stock Purchase Agreement between Motorola and the registrant. 10.13(1) Common Stock Purchase Agreement Between Nokia and the registrant. 10.14(1) Form of Management Retention Agreement. 10.15 Agreement for Purchase and Sale of Land between 3Com Corporation and the Registrant. 27.1 Financial Data Schedule.
(1) - Incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 333-92657) filed with the Commission on December 13, 1999, as amended. (2) - Incorporated by reference from the Registrant's Report on Form 10-Q filed with the Commission on April 10, 2000. (3) - Incorporated by reference from the Registration Statement on Form S-8 filed with the Commission on October 2, 2000. * - Denotes an executive or director compensation plan or arrangement. ** - Confidential treatment granted on portions of this exhibit. (b) Reports on Form 8-K None. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Palm, Inc. (Registrant) Dated: October 10, 2000 By: /s/ Judy Bruner --------------------- ------------------------------- Judy Bruner Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 38 EX-10.15 2 a2027596zex-10_15.txt EX-10.15 TABLE OF CONTENTS
PAGE ARTICLE I BASIC DEFINITIONS.......................................................................................1 Section 1.1 CLOSING DATE................................................................................1 Section 1.2 CONTINGENCY PERIOD..........................................................................1 Section 1.3 EFFECTIVE DATE..............................................................................1 Section 1.4 ENVIRONMENTAL LAWS..........................................................................1 Section 1.5 HANDLING....................................................................................1 Section 1.6 HAZARDOUS MATERIALS.........................................................................1 Section 1.7 INTANGIBLE PROPERTY.........................................................................3 Section 1.8 LAND........................................................................................3 Section 1.9 LIMITATIONS PERIOD..........................................................................3 Section 1.10 PERMITTED EXCEPTIONS........................................................................3 Section 1.11 PRELIMINARY REPORTS.........................................................................3 Section 1.12 PROPERTY....................................................................................3 Section 1.13 RELEASED PARTIES............................................................................3 Section 1.14 TITLE COMPANY...............................................................................3 Section 1.15 WASTE MATERIALS.............................................................................3 ARTICLE II PURCHASE AND SALE......................................................................................4 Section 2.1 PURCHASE AND SALE...........................................................................4 Section 2.2 PURCHASE PRICE..............................................................................4 Section 2.3 INTANGIBLE PROPERTY.........................................................................4 Section 2.4 DEPOSIT.....................................................................................4 Section 2.5 APPLICATION OF DEPOSIT......................................................................5 ARTICLE III CONDITIONS PRECEDENT..................................................................................5 Section 3.1 BUYER'S CONDITIONS PRECEDENT................................................................5 Section 3.2 SELLER'S CONDITIONS PRECEDENT...............................................................6 Section 3.3 FAILURE OR WAIVER OF CONDITIONS PRECEDENT...................................................7 Section 3.4 BUYER'S REVIEW AND SELLER'S DISCLAIMER......................................................7 Section 3.5 BUYER'S RELEASE.............................................................................8 ARTICLE IV WARRANTIES AND REPRESENTATIONS AND COVENANTS...........................................................9 Section 4.1 SELLER'S WARRANTIES AND REPRESENTATIONS.....................................................9 Section 4.2 BUYER'S REPRESENTATIONS AND WARRANTIES.....................................................10 Section 4.3 RESTATEMENT AT CLOSING.....................................................................11 Section 4.4 LIMITATIONS................................................................................11 Section 4.5 COVENANT NOT TO SUE........................................................................11 Section 4.6 BUYER'S INDEMNITY..........................................................................12 Section 4.7 SELLER'S COVENANTS.........................................................................12 ARTICLE V CONDITIONS OF TITLE....................................................................................13 Section 5.1 CONDITION OF TITLE.........................................................................13 Section 5.2 CURE OF TITLE DEFECTS......................................................................13
i TABLE OF CONTENTS
Page ARTICLE VI ESCROW AND CLOSING....................................................................................13 Section 6.1 ESCROW ARRANGEMENTS........................................................................13 Section 6.2 CLOSING....................................................................................14 Section 6.3 PRORATIONS AND CREDITS.....................................................................15 Section 6.4 OTHER CLOSING COSTS........................................................................15 ARTICLE VII MISCELLANEOUS........................................................................................16 Section 7.1 DAMAGE OR DESTRUCTION......................................................................16 Section 7.2 BROKERAGE COMMISSIONS AND FINDER'S FEES....................................................16 Section 7.3 SUCCESSORS AND ASSIGNS.....................................................................16 Section 7.4 NOTICES....................................................................................17 Section 7.5 TIME.......................................................................................18 Section 7.6 INCORPORATION BY REFERENCE.................................................................18 Section 7.7 ATTORNEYS' FEES............................................................................18 Section 7.8 CONSTRUCTION...............................................................................18 Section 7.9 NO MERGER..................................................................................18 Section 7.10 CONFIDENTIALITY AND RETURN OF DOCUMENTS....................................................18 Section 7.11 GOVERNING LAW..............................................................................19 Section 7.12 COUNTERPARTS...............................................................................19 Section 7.13 ENTIRE AGREEMENT...........................................................................19 Section 7.14 LIMITATION OF SELLER'S LIABILITY...........................................................19 Section 7.15 NO WAIVER..................................................................................19 Section 7.16 SEVERABILITY...............................................................................19 Section 7.17 WAIVER OF JURY TRIAL.......................................................................19 Section 7.18 FURTHER ASSURANCES.........................................................................20
EXHIBITS Exhibit A _ Description of Land Exhibit B - Form of Assignment of Intangible Property Exhibit C - Form of Deposit Escrow Instructions Exhibit D - [Reserved] Exhibit E - Form of Release Agreement and Covenant Not To Sue Exhibit F - Form of Grant Deed Exhibit G - Form of Non-Foreign Affidavit Exhibit H - Form of Designation Agreement Exhibit I - Preliminary Title Report Exhibit J - Form of Confidentiality Agreement AGREEMENT FOR PURCHASE AND SALE OF LAND AT HIGHWAY 237 AND NORTH FIRST STREET SAN JOSE, CALIFORNIA THIS AGREEMENT FOR PURCHASE AND SALE ("AGREEMENT") is made and entered into as of May 22, 2000 by and between 3COM CORPORATION, a Delaware corporation ("SELLER"), and PALM, INC, a Delaware corporation ("BUYER"). ARTICLE I BASIC DEFINITIONS Section 1.1 CLOSING DATE. "CLOSING DATE" shall mean the date for the close of Escrow (as defined in Section 6.1 below) and the recording of the deed conveying the Property to Buyer. The Closing Date shall be not later than August 7, 2000, subject to extension until September 5, 2000 under the terms of Section 6.1 below. Section 1.2 CONTINGENCY PERIOD. "CONTINGENCY PERIOD" shall mean the period commencing on the Effective Date and expiring 5:00 p.m. PDST July 6, 2000. Section 1.3 EFFECTIVE DATE. "EFFECTIVE DATE" shall mean the date set forth in the preamble to this Agreement. Section 1.4 ENVIRONMENTAL LAWS. "ENVIRONMENTAL LAWS" shall mean any applicable foreign, federal, state, or local law, statute, regulation, rule, ordinance, permit, prohibition, restriction, license, requirement, agreement, consent, or approval, or any determination, directive, judgment, decree or order of any executive, administrative or judicial authority at any federal, state or local level (whether now existing or subsequently adopted or promulgated) relating to pollution or the protection of the environment, natural resources or public health and safety. Section 1.5 HANDLING. "HANDLING" shall mean, at any time and to any extent and in any manner whatsoever, any presence of or any handling, storing, transferring, transporting, treating, using, recycling, separating, sorting, incinerating, transforming, reconstituting, containing, containerizing, packaging, manufacturing, generating, abandoning, covering, capping, dumping, closing, maintaining, disposing, placing, discarding, encapsulating, filling, landfilling, investigating, monitoring, remediating, removing, responding to, reporting on, testing, releasing, contamination resulting from, spilling, leaking, pouring, emitting, emptying, discharging, injecting, escaping, migrating, or leaching. Section 1.6 HAZARDOUS MATERIALS. "HAZARDOUS MATERIALS" shall mean any material, waste, chemical, compound, substance, mixture, or byproduct that is identified, defined, designated, listed, restricted or otherwise regulated under Environmental Laws as a "hazardous 1 constituent," "hazardous substance," "hazardous material," "extremely hazardous material," "hazardous waste," "acutely hazardous waste," "hazardous waste constituent," "infectious waste," medical waste," "biohazardous waste," "extremely hazardous waste," "pollutant," "toxic pollutant," or "contaminant," or any other formulation intended to classify substances by reason of properties that are deleterious to the environment, natural resources or public health or safety including, without limitation, ignitability, corrosiveness, reactivity, carcinogenicity, toxicity, and reproductive toxicity. The term "HAZARDOUS MATERIALS" shall include, without limitation, the following: (a) A "Hazardous Substance," "Hazardous Material," "Hazardous Waste," or "Toxic Substance" under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq. or the Solid Waste Disposal Act, 42 U.S.C. Section 6901, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended; (b) An "Acutely Hazardous Waste," "Extremely Hazardous Waste," "Hazardous Waste," or "Restricted Hazardous Waste," under Section 25110.02, 25115, 25117 or 25122.7 of the California Health and Safety Code, or is listed pursuant to Section 25140 of the California Health and Safety Code, as any of the foregoing may be amended; (c) A "Hazardous Material," "Hazardous Substance" or "Hazardous Waste" under Section 25281, 25316, 25501, or 25501.1 of the California Health and Safety Code, as any of the foregoing may be amended; (d) "Oil" or a "Hazardous Substance" under Section 311 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1321, as may be amended, as well as any other hydrocarbonic substance, fraction, distillate or by-product; (e) Any substance or material defined, identified or listed as an "Acutely Hazardous Waste," "Extremely Hazardous Material," "Extremely Hazardous Waste," "Hazardous Constituent," "Hazardous Material," "Hazardous Waste," "Hazardous Waste Constituent," or "Toxic Waste" pursuant to Division 4.5, Chapters 10 or 11 of Title 22 of the California Code of Regulations, as may be amended; (f) Any substance or material listed by the State of California as a chemical known by the State to cause cancer or reproductive toxicity pursuant to Section 25249.8 of the California Health and Safety Code, as may be amended; (g) A "Biohazardous Waste" or "Medical Waste" under Section 25020.5 or 25023.2 of the California Health and Safety Code, as may be amended; (h) Asbestos and any asbestos containing material; and/or (i) A substance that, due to its characteristics or interaction with one or more other materials, wastes, chemicals, compounds, substances, mixtures, or byproducts, damages or threatens to damage the environment, natural resources or public health or safety, or is required 2 by any law or public entity to be remediated, including remediation which such law or public entity requires in order for property to be put to any lawful purpose. Section 1.7 INTANGIBLE PROPERTY. "INTANGIBLE PROPERTY" shall mean that certain intangible property owned by Seller and used in connection with the Land consisting of reports, permits, and licenses, relating to the ownership and potential development of the Property. Section 1.8 LAND. "LAND" shall mean the real property, including all easements and other rights and interests appurtenant thereto, described in EXHIBIT A. Section 1.9 LIMITATIONS PERIOD. "LIMITATIONS PERIOD" shall mean one hundred eighty (180) days following the Closing Date. Section 1.10 PERMITTED EXCEPTIONS. "PERMITTED EXCEPTIONS" shall have the meaning set forth in Article V below. Section 1.11 PRELIMINARY REPORTS. "PRELIMINARY REPORTS" shall mean those certain Preliminary Title Reports with respect to the Property issued by the Title Company under Order Nos. 517718 and 517719, dated February 28, 2000, copies of which are attached as EXHIBIT I. Section 1.12 PROPERTY. "PROPERTY" shall mean collectively the Land, and the Intangible Property. Section 1.13 RELEASED PARTIES. "RELEASED PARTIES" shall mean Seller and its and their affiliates, parent business organizations, subsidiary business organizations, lenders who hold or held a security interest in all or a portion of the Property, shareholders, officers, directors, partners, employees, servants, heirs, executors, and successors. Section 1.14 TITLE COMPANY. "TITLE COMPANY" shall mean First American Title Company, 1737 North First Street, San Jose, CA 95112. Section 1.15 WASTE MATERIALS. "WASTE MATERIALS" shall mean any putrescible or nonputrescible solid, semisolid, liquid or gaseous waste of any type whatsoever, including, without limitation: (a) Any garbage, trash, refuse, paper, rubbish, ash, industrial or commercial or residential waste, demolition or construction wastes, abandoned vehicles or parts thereof, discarded home and industrial appliances, sewage, sewage sludge, manure, vegetable or animal solid and semisolid waste, and any other item intended to be or actually dumped, abandoned, discarded, treated, transformed, incinerated, disposed of or recycled; (b) Any "solid waste" as defined in the Solid Waste Disposal Act, 42 U.S.C. Section 6901, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended; 3 (c) Any "solid waste," as defined in the California Integrated Waste Management Act of 1989, California Public Resources Code Section 40000, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended; and/or (d) Any "waste" as defined in the Porter-Cologne Water Quality Control Act, California Water Code Section 13000 et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended. ARTICLE II PURCHASE AND SALE Section 2.1 PURCHASE AND SALE. Seller agrees to sell the Property to Buyer, and Buyer agrees to purchase the Property from Seller, upon all of the terms, covenants and conditions set forth in this Agreement. Section 2.2 PURCHASE PRICE. The purchase price for the Property (the "PURCHASE PRICE") shall be Two Hundred Sixteen Million Dollars ($216,000,000) which shall be paid by Buyer to Seller in cash through Escrow on the Closing Date. Section 2.3 INTANGIBLE PROPERTY. Upon the close of Escrow, Seller shall deliver to Buyer Seller's interest in the Intangible Property pursuant to an Assignment of Intangible Property in the form of EXHIBIT B hereto (the "ASSIGNMENT OF INTANGIBLE PROPERTY"). Section 2.4 DEPOSIT. (a) Within two (2) business days following full execution and delivery of this Agreement to Buyer, Buyer shall deposit in Escrow with the Title Company the sum of Two Million Five Hundred Thousand Dollars ($2,500,000) (the "INITIAL DEPOSIT"). At the same time the Initial Deposit is made into Escrow, Buyer and Seller shall execute and deliver to the Title Company Deposit Escrow Instructions in the form of EXHIBIT C. (b) If Buyer has not terminated this Agreement prior to such time, then on or before the end of the Investigation Period, Buyer shall deposit into Escrow with the Title Company as an increase to the Initial Deposit the additional sum of Three Million Five Hundred Thousand Dollars ($3,500,000). These funds, together with the Initial Deposit, shall be, collectively, the "DEPOSIT." (c) Buyer may cause the Deposit to be invested at interest while in Escrow using short term debt obligations subject to Seller's consent which shall not unreasonably be withheld. Any and all interest earned on the Deposit during the time it is held in Escrow shall belong to, and be paid to Buyer. 4 Section 2.5 APPLICATION OF DEPOSIT. In the event that the purchase and sale transaction is consummated as contemplated by this Agreement, then the entire amount of the Deposit received by Seller shall be credited against the Purchase Price. The Deposit shall be returned immediately to Buyer in the event that (a) any of the conditions precedent set forth in Sections 3.1 or 3.2 below are not fulfilled or waived by the party intended to be benefited thereby and this Agreement is terminated in accordance with Section 3.3 below, or (b) the conditions precedent set forth in Sections 3.1 and 3.2 shall have been satisfied or waived by the party intended to be benefited thereby, (ii) Buyer shall have performed fully or tendered performance of its obligations under this Agreement, and (iii) Seller shall be unable or fail to perform its obligations under this Agreement. IF BUYER DEFAULTS IN ITS OBLIGATION TO PURCHASE THE PROPERTY IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT, THE ENTIRE AMOUNT OF THE DEPOSIT SHALL BE PAID TO AND RETAINED BY SELLER AS LIQUIDATED DAMAGES. BUYER AND SELLER HEREBY ACKNOWLEDGE AND AGREE THAT SELLER'S DAMAGES IN THE EVENT OF SUCH A BREACH OF THIS AGREEMENT BY BUYER WOULD BE DIFFICULT OR IMPOSSIBLE TO DETERMINE, THAT THE AMOUNT OF THE DEPOSIT IS THE PARTIES' BEST AND MOST ACCURATE ESTIMATE OF THE DAMAGES SELLER WOULD SUFFER IN THE EVENT BUYER FAILS TO PURCHASE THE PROPERTY PURSUANT TO THIS AGREEMENT, AND THAT SUCH ESTIMATE IS REASONABLE UNDER THE CIRCUMSTANCES EXISTING ON THE DATE OF THIS AGREEMENT. BUYER AND SELLER AGREE THAT SELLER'S RIGHT TO RETAIN THE DEPOSIT SHALL BE THE SOLE REMEDY OF SELLER FOR BUYER'S FAILURE TO PURCHASE THE PROPERTY AS A RESULT OF BUYER'S BREACH OF THIS AGREEMENT. THE PARTIES ACKNOWLEDGE THAT THE PAYMENT OF SUCH AMOUNTS AS LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY WITHIN THE MEANING OF CALIFORNIA CIVIL CODE SECTIONS 3275 OR 3369, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER PURSUANT TO CALIFORNIA CIVIL CODE SECTIONS 1671, 1676 AND 1677. ACCEPTED AND AGREED TO: ________________________________ ___________________________________ Seller Buyer ARTICLE III CONDITIONS PRECEDENT Section 3.1 BUYER'S CONDITIONS PRECEDENT. Notwithstanding anything in this Agreement to the contrary, Buyer's obligation to purchase the Property shall be subject to and contingent upon the satisfaction or timely waiver by Buyer of each of the following conditions precedent: 5 (a) On or before the Closing Date, the timely performance by Seller of each and every material covenant and undertaking to be performed by Seller pursuant to this Agreement and the continued truth or accuracy as of the Closing Date of the representations and warranties of Seller made as of the Effective Date. If Seller becomes aware that any representation or warranty of Seller should be modified due to changes in circumstances or additional information which becomes available following the Effective Date, Seller shall deliver to Buyer a statement correcting such representation or warranty. Seller shall not be liable to Buyer for, or be deemed to be in default under this Agreement by reason of, any breach of a representation or warranty which results from any change that (A) occurs between the Effective Date and the Closing Date, and (B) is not prohibited under this Agreement or is beyond the reasonable control of Seller to prevent (including the discovery by Buyer or Seller of additional information prior to the Closing Date). Notwithstanding the foregoing, if the breach of such representation or warranty is adverse to Buyer, Buyer may treat such event as a failure of its condition precedent and may terminate this Agreement under Section 3.3 below or if such breach arises from a change which is a result of Seller's breach of its obligations under this Agreement or an intentional act or omission which makes a Seller's representation or warranty untrue, then Buyer may treat such event as a default of Seller. (b) Prior to the expiration of the Investigation Period, Buyer's inspection and approval, in Buyer's sole discretion, of all physical, environmental, economic and legal matters relating to the Property pursuant to and subject to the limitations in Section 3.4 below. (c) The willingness of Title Company or some other reputable title insurer reasonably acceptable to Buyer to issue, upon the sole condition of the payment of its regularly scheduled premium, its standard American Land Title Association owner's extended coverage form policy of title insurance ("BUYER'S TITLE POLICY"), with such endorsements and reinsurance agreements as Buyer reasonably shall require, insuring Buyer in the amount of the Purchase Price that title to the Land is vested of record in Buyer on the Closing Date, subject only to the printed conditions and exceptions of such policy, and the Permitted Exceptions described in Section 5.1 below. Section 3.2 SELLER'S CONDITIONS PRECEDENT. Notwithstanding anything in this Agreement to the contrary, Seller's obligation to sell the Property shall be subject to and contingent upon the satisfaction or waiver by Seller of the following conditions precedent: (a) The entire Deposit shall have been timely deposited into Escrow under Section 2.5 above. (b) On or before the Closing Date, the due and timely performance by Buyer of each and every material covenant and undertaking to be performed by Buyer pursuant to this Agreement, and the continued truth or accuracy as of the Closing Date of the representations and warranties of Buyer as made as of the Effective Date. If Buyer becomes aware that any representation or warranty of Buyer should be modified due to changes in circumstances or additional information which becomes available following the Effective Date, Buyer shall deliver to Seller a statement correcting such representation or warranty. Buyer shall not be liable to Seller for, or be deemed to be in default under this Agreement by reason of, any breach of a representation or warranty which results from any change that (i) occurs between the Effective 6 Date and the Closing Date, and (ii) is not prohibited under this Agreement or is beyond the reasonable control of Buyer to prevent, or is the result of the discovery by Buyer or Seller of additional information. Notwithstanding the foregoing, if the breach of such representation or warranty is materially adverse to Seller, Seller may treat such event as a failure of its condition precedent and may terminate this Agreement under Section 3.3 below or if such breach arises from a change which is a result of Buyer's breach of its obligations under this Agreement or an intentional act or omission which makes a Buyer's representation or warranty untrue, then Seller may treat such event as a default of Buyer. (c) Approval of this Agreement and the transaction contemplated herein by Buyer's Board of Directors on or before 5:00 p.m. PDST on May 22, 2000. (d) Approval of this Agreement and the transaction contemplated herein by Seller's Board of Directors on or before 5:00 p.m. PDST on June 2, 2000. Section 3.3 FAILURE OR WAIVER OF CONDITIONS PRECEDENT. In the event any of the conditions set forth in Sections 3.1 or 3.2 are not fulfilled or waived by the party intended to be benefited thereby, this Agreement shall terminate and all rights and obligations hereunder of each party shall be at an end; provided that such termination shall not affect Seller's right to pursue recovery of liquidated damages or any claims for indemnification and attorneys' fees and Buyer's legal and equitable remedies and recovery of attorneys' fees to which each of them may be entitled under this Agreement, which rights shall survive such termination. If a party does not give timely notice to the other of its approval of a condition precedent for its benefit, that party shall be deemed to have disapproved such condition and such condition shall be deemed not to have been fulfilled. The provisions of Section 2.5 shall govern the application of the Deposit. Either party may, at its election, at any time or times on or before the date specified for the satisfaction of the condition, waive in writing the benefit of any of the conditions set forth in Sections 3.1 and 3.2 above. The close of Escrow for the purchase of the Property pursuant to this Agreement shall be deemed the waiver by each party of any remaining unfulfilled conditions in favor of such party to the extent such party was aware that such conditions remained unfulfilled at such time. Section 3.4 BUYER'S REVIEW AND SELLER'S DISCLAIMER. (a) Buyer's increase of the Deposit on or prior to the end of the Investigation Period shall constitute Buyer's acknowledgement that Buyer has been permitted to make a complete physical inspection of the Property and to review and copy at the Seller's office all documents and information in Seller's possession regarding the physical condition of the Property which Buyer deems material to the purchase of the Property. Such documents will have included, to the extent such are in Seller's possession, all drawings, specifications, soils reports, engineering and architectural studies, hazardous unit studies, hydrology reports, topographical maps, grading plans and similar data. Seller shall permit Buyer reasonable access to the Property, shall cooperate with Buyer in the making of its investigations but shall not be obligated to incur any out-of-pocket expense in connection therewith. Buyer shall not perform any invasive or destructive testing or sampling of any portion of the Property without Seller's prior consent to the proposed work plan for such testing or sampling and of the contractor(s) which are 7 to perform such work, which consent shall not unreasonably be withheld or delayed. By proceeding to increase the Deposit and to purchase the Property, Buyer acknowledges that Seller has given Buyer every opportunity to consider, inspect and review to its satisfaction the physical, environmental, economic and legal condition of the Property and all documents and information in Seller's possession which Buyer deems material to the purchase of the Property. (b) Buyer shall indemnify and defend Seller against and hold Seller harmless from any and all loss, cost, liability and expense (including reasonable attorneys' fees) arising out of the activities of Buyer, its employees, contractors and agents on the Property prior to the close of escrow. This indemnification shall survive the closing of Buyer's purchase of the Property or the termination of this Agreement. Prior to any entry onto the Property by Buyer or its agents, Buyer shall deliver to Seller evidence of Buyer's commercial general liability insurance, which may be provided under a blanket policy, with blanket contractual obligations endorsement, and a minimum limit of at least Five Million Dollars ($5,000,000), endorsed to name Seller as additional insured and to provide Seller with at least thirty (30) days' written notice prior to cancellation or material reduction in coverage. (c) Other than as expressly set forth herein, Seller disclaims the making of any representations or warranties, express or implied, regarding the Property or matters affecting the Property including, without limitation, the physical condition of the Property, title to or the boundaries of the Property, pest control matters, soil condition, the use, presence or release of Hazardous Materials as defined, other environmental matters, compliance with building, health, safety, land use and zoning laws, regulations and orders, structural and other engineering characteristics, traffic patterns and all other information pertaining to the Property. Buyer acknowledges that Buyer has not and shall not rely on any of the studies, reports, maps or other documents, if any, made available by Seller to Buyer, and to the extent that Seller has delivered or made available to Buyer any such documents, it has done so strictly as an accommodation to Buyer and without any representation or warranty, express or implied, concerning the accuracy or completeness of the information contained in such documents. Buyer acknowledges and agrees that (i) Buyer has entered into this Agreement with the intention of relying upon its own investigation of the physical, environmental, economic and legal condition of the Property, and (ii) other than those representations and warranties expressly set forth herein or in any instrument delivered by Seller at closing, Buyer is not relying upon any representations or warranties made by Seller or anyone acting or claiming to act on Seller's behalf concerning the Property. Subject to the representations, warranties and covenants of Seller expressly set forth herein, Buyer shall purchase the Property in its "AS IS" condition, "WITH ALL FAULTS" on the Closing Date and assumes the risk that adverse physical, environmental, economic or legal conditions may not have been revealed by its investigation. Section 3.5 BUYER'S RELEASE. The release of Claims (as defined below) set forth in this Section 3.5 shall be referred to as the "RELEASE." Buyer hereby for itself and each and all of its successors-in-interest in chain of title to the Property and each and all of their respective heirs, executors, successors and assigns (collectively, the "WAIVER PARTIES") hereby forever, absolutely, unconditionally and completely releases and discharges the Released Parties from and against any and all actual, threatened or potential claims, suits, proceedings, actions, causes of action, demands, liabilities, losses, obligations, orders, requirements or restrictions, liens, penalties, 8 fines, charges, debts, damages, costs, and expenses of every kind and nature, whether now known or unknown, whether foreseeable or unforeseeable, whether under any foreign, federal, state or local law (both statutory and nonstatutory), and, whether asserted or demanded by a third party against any of the Waiver Parties or incurred directly or indirectly by any of the Waiver Parties themselves, that any of the Waiver Parties may now or hereafter have against any of the Released Parties (collectively, "CLAIMS"), and that arise in connection with or in any way are related to (i) any Handling of any Waste Materials or Hazardous Materials at, beneath, to, from or about the Property, (ii) any compliance or non-compliance with Environmental Laws regarding any Waste Materials, Hazardous Materials or any Handling related thereto at, beneath, to, from or about the Property, (iii) any acts, omissions, services or other conduct related to any of the foregoing items "(i)" or "(ii)," inclusive, and/or (iv) any condition, activity or other matter respecting the Property that is not addressed by any of the foregoing items "(i)" - "(iii)," inclusive and that is related to pollution or protection of the environment, natural resources, or public health and safety. BUYER HEREBY SPECIFICALLY WAIVES THE PROVISIONS OF SECTION 1542 OF THE CALIFORNIA CIVIL CODE ("SECTION 1542") AND ANY SIMILAR LAW OF ANY OTHER STATE, TERRITORY OR JURISDICTION. SECTION 1542 PROVIDES: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. BUYER HEREBY SPECIFICALLY ACKNOWLEDGES THAT BUYER HAS CAREFULLY REVIEWED THIS SUBSECTION AND DISCUSSED ITS IMPORT WITH LEGAL COUNSEL AND THAT THE PROVISIONS OF THIS SUBSECTION ARE A MATERIAL PART OF THIS AGREEMENT. _____________________________ Buyer ARTICLE IV WARRANTIES AND REPRESENTATIONS AND COVENANTS Section 4.1 SELLER'S WARRANTIES AND REPRESENTATIONS. Seller hereby makes the following representations and warranties to Buyer which, subject to the limitations set forth in this Agreement, shall survive the close of Escrow and the recording of the Deed. (a) Seller is a corporation, duly existing and organized under the laws of the State of Delaware and in good standing under the laws of the State of Delaware and has full power and 9 lawful authority to enter into and carry out the terms and provisions of this Agreement and to execute and deliver all documents which are contemplated by this Agreement, and all actions necessary to confer such power and authority upon the persons executing this Agreement and all documents which are contemplated by this Agreement to be executed on behalf of Seller have been taken. Seller's execution, delivery and performance of this Agreement will not result in any violation of, or default under, any document by which Seller is organized, any agreement to which Seller is a party or by which Seller or the Property is bound. When Seller gives notice to Buyer that this Agreement has been approved by Seller's Board of Directors, then this Agreement will have been, and the documents contemplated to be delivered by Seller at closing will be, duly authorized, executed and delivered by Seller and is and will be the legal, valid and binding obligations of Seller. (b) Seller is not a foreign person, foreign corporation, foreign partnership, foreign trust or foreign estate, as those terms are defined in the Internal Revenue Code Section 1445 and any related regulations. (c) Other than approval by Seller's Board of Directors and other than the City of San Jose with respect to the Development Agreement other than the Site Development Permit which affect the Land, no approval, consent, waiver, filing, registration or qualification with any third party, including, but not limited to, any governmental bodies, agencies or instrumentalities, is required to be made, obtained or given for the execution, delivery and performance of this Agreement or any of the Seller Closing Documents by Seller. (d) There are no leases executed by Seller or its predecessors in title or other rights of occupancy or use granted by Seller or its predecessors in title of any portion of the Property which would become an obligation of Buyer upon close of escrow. (e) There is no litigation, including any arbitration or other proceeding by or before any court, arbitrator or governmental or regulatory official, body or authority which is pending against Seller or of which Seller has received written notice directed to Seller relating to the Property or the sale contemplated hereunder. (f) Seller has not received any written notice directed to Seller from any governmental authority having jurisdiction over the Property of, any violation of any law, ordinance, order or regulation (including ADA) affecting the Property, or any portion thereof, which has not heretofore been complied with. (g) Copies of current real estate tax bills with respect to the Property have been delivered or made available to Buyer. No portion of the Property comprises part of a tax parcel which includes property other than property comprising all or a portion of the Property. (h) Seller has made available for inspection all documents in its possession pertaining to the physical condition of and potential for development of the Property. Section 4.2 BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer hereby makes the following representations and warranties to Seller which, subject to the limitations set forth in this Agreement, shall survive the close of Escrow and the recording of the deeds. Buyer is a 10 corporation, duly existing and organized under the laws of the State of Delaware and in good standing under the laws of the State of Delaware and has full power and lawful authority to enter into and carry out the terms and provisions of this Agreement and to execute and deliver all documents which are contemplated by this Agreement, and all actions necessary to confer such power and authority upon the persons executing this Agreement and all documents which are contemplated by this Agreement to be executed on behalf of Buyer have been taken. Buyer's execution, delivery and performance of this Agreement will not result in any violation of, or default under, any document by which Buyer is organized, any agreement to which Buyer is a party or by which Buyer or the Property is bound. This Agreement has been, and the documents contemplated to be delivered by Buyer at closing will be, duly authorized, executed and delivered by Buyer and is and will be the legal, valid and binding obligations of Buyer. Section 4.3 RESTATEMENT AT CLOSING. The foregoing warranties and representations of Seller and Buyer shall be deemed restated and remade by Seller and Buyer in their entirety as of the Closing Date. If at any time after the Effective Date and prior to the Closing Date, there is a change in circumstances or either Seller or Buyer acquires any information or knowledge which would, without disclosure, make any of the warranties or representations made by either of the parties materially untrue or materially misleading, then the party obtaining such knowledge shall immediately notify the other party and such event shall be governed by the provisions of paragraphs 3.1(a) and 3.2(b). Section 4.4 LIMITATIONS. The parties agree that (a) Seller's warranties and representations contained in this Agreement and in any document (including any estoppel or other certificate) executed by Seller pursuant to this Agreement shall survive Buyer's purchase of the Property only for the Limitation Period, and (b) Buyer shall within the Limitation Period provide written notice to Seller of any breach of such warranties or representations and shall allow Seller thirty (30) days following the giving of such notice within which to cure such breach, or, if such breach cannot reasonably be cured within thirty (30) days, an additional reasonable time period not to exceed one hundred eighty (180) days, so long as such cure has been commenced within such thirty (30) days and diligently pursued. If Seller fails to cure such breach after actual notice and within such cure period, Buyer's sole remedy shall be an action at law for damages as a consequence thereof, which must be commenced, if at all, within ninety (90) days after the last day Seller was entitled to cure such breach hereunder or after Seller provides Buyer with notice of termination of such cure effort. The Limitation Period referred to herein shall apply to known as well as unknown breaches of such warranties or representations. Notwithstanding the foregoing, no representation or warranty shall survive the close of Escrow if, at the time of closing, the party intended to be benefited knew of a breach of such representation or warranty as of such closing. Section 4.5 COVENANT NOT TO SUE. Buyer, on its own behalf and on behalf of each of the other Waiver Parties, covenants and agrees never to sue or otherwise commence, or prosecute any action or other proceeding against any of the Released Parties, for a claim released pursuant to the Release (collectively, "COVENANT NOT TO SUE"). If any of the Waiver Parties asserts a claim that is contrary to the Release, said Waiver Party shall indemnify, defend and hold harmless the Released Parties against whom such claim is asserted for all liabilities, including 11 court costs and reasonable attorneys, fees, which are asserted against any of the Released Parties in connection with such action or proceeding. The parties hereto agree that this Covenant Not to Sue may be pleaded by a Released Party as a full and complete defense to any action or proceeding by a Waiver Party that is contrary to the terms of the Release, and may be asserted as a basis for abatement of, or injunction against, said action or proceeding and as a basis for a cross-complaint for damages therein. In the event a Waiver Party breaches the Covenant Not To Sue, any Released Party damaged thereby shall be entitled to recover not only the amount of any judgment which may be awarded in favor of such damaged Released Party, but also for such other damages, costs, and expenses as may be incurred by such damaged Released Party, including court costs, reasonable attorneys' fees and all other costs and expenses, taxable or otherwise, in preparing the defense of, defending against, or seeking and obtaining abatement of, or injunction against, such action or proceeding, and establishing and maintaining the applicability of the Release and the Covenant (as defined below) or any provision thereof. Section 4.6 BUYER'S INDEMNITY. At closing, Buyer shall execute, acknowledge and deliver through recordation to Seller a Release Agreement and Covenant Not to Sue in the form of EXHIBIT E hereto (the "Covenant"). Section 4.7 SELLER'S COVENANTS. (a) Between the Effective Date and the Closing Date (or termination of this Agreement) Seller shall: (i) maintain the Property in the ordinary course of Seller's business, and substantially in accordance with present practice; (ii) not transfer or enter into any contract to transfer the Property which is not conditioned upon Buyer's failure to purchase the Property or create on the Property any easements, liens, mortgages, encumbrances or other interests which will survive the closing; and not apply for any changes in the zoning classification of the Property; and (iii) not enter into any contract pertaining to the use or occupancy of the Property or enter into any agreement pertaining to the maintenance of the Property which is not terminable upon thirty (30) days' notice. (b) Seller shall pay the cost of an ALTA/ASTM survey of the Land but only with such certifications as Buyer reasonably may require. (c) Upon or prior to the close of escrow Seller shall cause to be removed of record all deeds of trust, mechanics' liens, the liens of delinquent property taxes and assessments and similar monetary liens created by, through or under Seller. (d) Upon or prior to the close of escrow, Seller shall terminate any and all contracts, leases and other agreements affecting the Property. 12 ARTICLE V CONDITIONS OF TITLE Section 5.1 CONDITION OF TITLE. Buyer shall accept title to the Property subject to the following matters: (i) as of Closing Date, the lien for current real property taxes not yet due and payable including any supplementary taxes which may be imposed as a result of Buyer's purchase of the Property from Seller; (ii) exceptions 1, 2 (as to taxes and assessments accruing following the Closing Date) and 3 through 19, as shown on the Preliminary Report issued under Order No. 517718 and exceptions 1, 2 (as to taxes and assessments accruing following the Closing Date) and 3 through 15, as shown on the Preliminary Report issued under Order No. 517719, as well as the Development Agreement among City, Seller and BNP Leasing, dated August 5, 1997 (the "Development Agreement"); (iii) such amendments of the Site Development Permit described in exception Nos. 18 and 19 in the Preliminary Report issued under Order No. 517718 and of the Development Agreement as shall have been applied for by Seller and not disapproved by Buyer on or before the end of the Investigation Period; and (iv) matters created by, through or under Buyer. All of the foregoing shall be, collectively, the "PERMITTED EXCEPTIONS." Section 5.2 CURE OF TITLE DEFECTS. If, prior to the Closing Date, the Title Company discloses any title exceptions other than the Permitted Exceptions, then Seller, at its sole option, shall have thirty (30) days from the giving of notice by Buyer or the Title Company to Seller to cause to be removed as exceptions or insured over at no expense to Buyer such exceptions. If such 30-day period extends beyond the scheduled Closing Date, the Closing Date shall be extended until the first business day following the expiration of such 30-day period. ARTICLE VI ESCROW AND CLOSING Section 6.1 ESCROW ARRANGEMENTS. (a) An escrow for the purchase and sale contemplated by this Agreement has been opened by Seller with Title Company (the "ESCROW"). On or before the Closing Date, Seller and Buyer shall each deliver escrow instructions to the Title Company consistent with this Article VI and the parties shall deposit in the Escrow the funds and documents described below. (b) Buyer may cause the Closing Date to be delayed until September 5, 2000 by payment directly to Seller on or before 5:00 p.m. PDST on July 5, 2000 of One Million Five Hundred Thousand Dollars ($1,500,000) in immediately available funds, which amount shall not be credited against the Purchase Price. (c) Seller shall deposit into Escrow: 13 (i) a duly executed and acknowledged deed to Buyer and/or permitted assignees of Buyer's rights under this Agreement in the form attached to this Agreement as EXHIBIT F (the "GRANT DEED"); (ii) two (2) duly executed and acknowledged counterparts of the Covenant; (iii) a duly executed counterpart of the Assignment of Intangible Property; (iv) a duly executed Affidavit of Non-foreign Status in the form attached to this Agreement as EXHIBIT G (the "AFFIDAVIT"); (v) a duly executed California Franchise Tax Board Form 590 (the "FORM 590"); (vi) three (3) executed counterparts of a Designation Agreement in the form attached hereto as EXHIBIT H (the "DESIGNATION AGREEMENT"); and (vii) Seller's escrow instructions and preliminary closing statements consistent with the terms of this Agreement. (d) Buyer shall deposit into Escrow: (i) cash in the amount of the Purchase Price as adjusted for prorations, less the Deposit ("SELLER'S FUNDS"), plus sufficient additional cash to pay Buyer's share of all Escrow costs and closing expenses; (ii) two (2) duly executed and acknowledged counterparts of the Covenant; (iii) an executed counterpart of the Assignment of Intangible Property (iv) three (3) duly executed counterparts of the Designation Agreement; and (v) Buyer's escrow instructions and preliminary closing statements consistent with the terms of this Agreement. Section 6.2 CLOSING. Title Company shall close the Escrow by: (a) executing three (3) counterparts of the Designation Agreement; (b) recording in the Official Records of Santa Clara County the Grant Deed and an executed counterpart of the Covenant; (c) issuing Buyer's Title Policy to Buyer; 14 (d) delivering to Buyer the Affidavit, the Form 590, a complete counterpart of the Assignment of Intangible Property, the Designation Agreement and the Covenant; and (e) delivering to Seller Seller's Funds (after adjusting for prorations, Escrow costs and closing expenses as described below), a counterpart of each of the Assignment of Intangible Property and the Designation Agreement and, through recordation, a counterpart of the Covenant. Section 6.3 PRORATIONS AND CREDITS. (a) The following shall be apportioned with respect to the Property as of 12:01 a.m. on the Closing Date, as if Buyer were vested with title to the Property during the entire day of the Closing Date: (i) taxes and assessments (including, without limitation, personal property taxes on the Personal Property) and assessments levied against the Property ("PROPERTY TAXES"). Buyer and Seller shall prorate real estate taxes and assessments for the period for which such taxes are assessed, regardless of when payable. Any taxes paid at or prior to the Closing Date shall be prorated based upon the amounts actually paid. If taxes and assessments for the current year have been determined but have not been paid before closing, Seller shall be charged and Buyer credited at closing an amount equal to that portion of such taxes and assessments which relates to the period before the Closing Date and Buyer shall pay the taxes and assessments prior to their becoming delinquent. If the actual taxes and assessments are not known at closing, the proration shall be based upon the most recent assessed values and tax rates. To the extent that the actual taxes and assessments paid differ from the amount apportioned at closing, the parties shall make all necessary adjustments by appropriate payments between themselves within thirty (30) days of the issuance of final tax bills. Seller shall pay any supplemental Property Taxes which relate to the period prior to the Closing Date. The foregoing obligation shall survive the close of Escrow. (ii) Gas, electricity and other utility charges for which Seller is responsible, if any; such charges to be apportioned at Closing on the basis of the most recent meter reading occurring prior to the Closing Date (dated not more than two (2) days prior to the Closing Date) or, if unmetered, on the basis of a current bill for each such utility; and (b) The obligations under this Section shall survive the close of Escrow. Section 6.4 OTHER CLOSING COSTS. Buyer and Seller shall each pay one-half of the Escrow fees and recording fees for the Deed and the Covenant and one-half of City transfer taxes. Seller shall pay County transfer taxes and the premium for a California Land Title Association standard coverage owner's policy in the amount of the Purchase Price. Buyer shall pay all additional premiums for Buyer's Title Policy, including without limitation, the cost of any endorsements thereto requested by Buyer. All other costs of Escrow and closing of this transaction shall be apportioned in accordance with custom in the County of Santa Clara. 15 ARTICLE VII MISCELLANEOUS Section 7.1 DAMAGE OR DESTRUCTION. If there shall be damage to or destruction of the Personal Property during the period from the Effective Date through the Closing Date (the "CONTRACT PERIOD"), then Seller shall promptly notify Buyer and the provisions of this Section shall be applicable. (a) Buyer shall proceed to purchase the Property pursuant to this Agreement notwithstanding such damage or destruction. Seller shall promptly conclude the loss adjustment under any insurance which Seller may have related to such damage or destruction. Any casualty insurance proceeds for damage or destruction during the Contract Period received by Seller prior to the Closing Date and not expended on restoration of the Property before the Closing Date shall be delivered by Seller to Buyer on the Closing Date. Any casualty insurance proceeds received by Seller after the Closing Date for damage or destruction during the Contract Period and not expended by Seller on restoration of the Property shall be promptly delivered by Seller to Buyer. (b) Seller shall cooperate fully with all reasonable requests of Buyer in the processing of such insurance claims and shall keep Buyer reasonably informed as to the status thereof. Subject to the consent of its insurance carriers and the holder of any lien on the Property, upon the close of Escrow, Seller shall assign to Buyer all of Seller's rights under any policy or policies of casualty covering losses to the Property occurring during the Contract Period and not expended prior to the close of Escrow for repair or reconstruction. Section 7.2 BROKERAGE COMMISSIONS AND FINDER'S FEES. Each party to this Agreement warrants to the other that other than Cornish & Carey Commercial ("SELLER'S BROKER") no person or entity can properly claim a right to a real estate commission, real estate finder's fee, real estate acquisition fee or other real estate brokerage-type compensation (collectively, "REAL ESTATE COMPENSATION") based upon the acts of that party with respect to the transaction contemplated by this Agreement. Seller shall pay any Real Estate Compensation due under its agreement with Seller's Broker. Each party hereby agrees to indemnify and defend the other against and to hold the other harmless from any and all loss, cost, liability or expense (including but not limited to attorneys' fees and returned commissions) resulting from any claim for Real Estate Compensation by any person or entity based upon such acts or from payment of Real Estate Compensation to any person by the indemnifying party. This indemnification and defense obligation shall survive the close of the Escrow contemplated herein and, if such Escrow does not close, the termination of this Agreement. Section 7.3 SUCCESSORS AND ASSIGNS. The terms, covenants, and conditions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, successors, and assigns. Buyer shall not assign any of Buyer's rights or duties hereunder (a) except to an entity which is directly or indirectly wholly-owned by Buyer or (b) otherwise with 16 respect to an assignment which is effective simultaneous with the close of Escrow without the prior written consent of Seller which shall not unreasonably be withheld. In all events, no such assignment shall be effective unless such assignee explicitly assumes, for the benefit of Seller, Buyer's obligations under this Agreement pursuant to an instrument delivered to Seller. Seller shall not convey the Property except to an entity which explicitly assumes, for the benefit of Seller, Buyer's obligations under this Agreement pursuant to an instrument delivered to Seller and which executes, acknowledges and delivers the Covenant. Upon such assignment, assumption and conveyance, Palm, Inc. shall be released from all obligations and liability to Seller other than those arising out of: (a) Buyer's obligations under paragraph 3.4(b), (b) the release set forth in Section 3.5, (c) the covenant not to sue in Section 4.5, (d) the actions of Buyer or those for whom it is liable, or (e) Buyer's breach of this Agreement occurring prior to such release. Section 7.4 NOTICES. All notices or other communications required or permitted hereunder shall be in writing, and shall be personally delivered, sent by facsimile, reputable overnight courier, or sent by registered or certified mail, postage prepaid, return receipt requested, and shall be deemed received upon the earlier of (a) if personally delivered, the date of delivery to the address of the person to receive such notice, (b) if mailed, two (2) business days after the date of posting by the United States post office, (c) if delivered by Federal Express or other overnight courier for next business day delivery, the next business day or (d) if sent by facsimile, with the original sent on the same day by overnight courier, the date on which the facsimile is received, provided it is before 5:00 P.M. Pacific Time. Notice of change of address shall be given by written notice in the manner detailed in this Section 7.4. Rejection or other refusal to accept or the inability to deliver because of a change in address of which no notice was given shall be deemed to constitute receipt of the notice, demand, request or communication sent. Unless changed in accordance herewith, the addresses for notices given pursuant to this Agreement shall be as follows: If to Seller: 3Com Corporation 5400 Bayfront Plaza Santa Clara, CA 95052 Attn: Abe Darwish Tel: (408) 326-5000 Fax: (408) 326-5718 with a copy to: Thelen Reid & Priest LLP 101 Second Street, Suite 1800 San Francisco, CA 94105 Attn: Richard Shapiro Tel: (415) 369-7117 Fax: (415) 371-1211
17 If to Buyer: Palm, Inc. 5400 Bayfront Plaza Santa Clara, CA 95052 Attn: John Igoe Tel: (408) 326-9805 Fax: (408) 326-9998 with a copy to: Gray Carey Ware & Freidenrich LLP 400 Hamilton Avenue Palo Alto, CA 94301 Attn: Jeffrey Trant Tel: (650) 833-2023 Fax: (650) 328-3029
Section 7.5 TIME. Time is of the essence of every provision contained in this Agreement. Section 7.6 INCORPORATION BY REFERENCE. All of the exhibits attached to this Agreement or referred to herein and all documents in the nature of such exhibits, when executed, are by this reference incorporated in and made a part of this Agreement. Section 7.7 ATTORNEYS' FEES. In the event any dispute between Buyer and Seller should result in arbitration or litigation, the prevailing party, if any, as determined by the court or arbitrator, shall be reimbursed for all reasonable costs incurred in connection with such litigation, including, without limitation, reasonable attorneys' fees. The obligations of the parties under this Section shall survive the close of Escrow or the termination of this Agreement. Section 7.8 CONSTRUCTION. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits hereto. The captions preceding the text of each Section are included for convenience of reference only and shall be disregarded in the construction and interpretation of this Agreement. Section 7.9 NO MERGER. The provisions of this Agreement shall not merge with the delivery of the Grant Deed contemplated in this Agreement but shall, except as otherwise provided in this Agreement, survive the close of Escrow. Section 7.10 CONFIDENTIALITY AND RETURN OF DOCUMENTS. (a) Buyer and Seller shall each maintain as confidential this Agreement and any and all documents and information obtained about the other or, in the case of Buyer, about the Property and prior to Buyer's purchase of the Property shall not disclose such information to any third party, except to their respective agents partners, directors, officers, employees, advisers, counsel, accountants, lenders, potential lenders, members and shareholders, with a legitimate 18 need to know such information, and except to the extent required by law or court order. Prior to receiving a copy of this Agreement or any confidential information described above, all of Buyer's representatives shall execute and deliver a confidentiality agreement in the form attached as EXHIBIT J. The foregoing obligations shall not apply to information or materials which is or otherwise becomes available to the public. (b) In the event the transaction contemplated hereunder is not consummated, Buyer shall deliver to Seller all drawings, permits, applications, reports, engineering data, and any other documents, instruments, or information of any kind relating to the Property (other than financial projections and marketing reports prepared by or for Buyer) including drawings for potential development of the Property, provided by Seller, its agents and contractors to Buyer, and all of the foregoing shall immediately become the property of Seller. This Section 7.10 shall survive the close of Escrow or termination of this Agreement. Section 7.11 GOVERNING LAW. This Agreement shall be construed and interpreted in accordance with and shall be governed and enforced in all respects according to the laws of the State of California. Section 7.12 COUNTERPARTS. This Agreement may be executed in one or more counterparts. All counterparts so executed shall constitute one contract, binding on all parties, even though all parties are not signatory to the same counterpart. Section 7.13 ENTIRE AGREEMENT. This Agreement and the attached exhibits, which are by this reference incorporated herein and all documents in the nature of such exhibits, when executed, contain the entire understanding of the parties and supersede any and all other written or oral understanding. This Agreement may be amended only by a written agreement so specifying, executed by both parties. Section 7.14 LIMITATION OF SELLER'S LIABILITY. The aggregate liability of Seller to Buyer and all those claiming by or through Buyer for claims, demands, damages, expenses (including attorneys' fees), suits, awards, judgments and liabilities asserted, awarded or otherwise recovered against Seller in connection with this Agreement or the Property (all of the foregoing are, collectively, "LIABILITIES") shall not exceed the proceeds, if any, of insurance received by Seller in connection with such Liabilities plus One Million Dollars ($1,000,000) (plus, if the transaction does not close, a return of the Deposit). Section 7.15 NO WAIVER. The failure by either party to enforce against the other any term of this Agreement shall not be deemed a waiver of such party's right to enforce against the other party the same or any other term in the future. Section 7.16 SEVERABILITY. If any one or more of the provisions hereof shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid, illegal or unenforceable provision were not herein contained. Section 7.17 WAIVER OF JURY TRIAL. EACH OF SELLER AND BUYER HEREBY WAIVES ANY AND ALL RIGHTS THAT EACH MAY NOW OR HEREAFTER 19 HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR ANY STATE, TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTIONS CONTEMPLATED THEREBY OR RELATED THERETO. IT IS INTENDED THAT THIS WAIVER SHALL APPLY TO ANY AND ALL CAUSES OF ACTION, DEFENSES, RIGHTS, CLAIMS AND/OR COUNTERCLAIMS, WHETHER IN CONTRACT, TORT OR OTHERWISE, IN ANY SUCH ACTION OR PROCEEDING. EACH OF SELLER AND BUYER UNDERSTAND THAT THIS WAIVER IS A WAIVER OF A CONSTITUTIONAL SAFEGUARD, AND EACH OF SELLER AND BUYER INDIVIDUALLY BELIEVES THAT THERE ARE SUFFICIENT ALTERNATE PROCEDURAL AND SUBSTANTIVE SAFEGUARDS, INCLUDING, WITHOUT LIMITATION, A TRIAL BY AN IMPARTIAL JUDGE, THAT ADEQUATELY OFFSET THE WAIVER CONTAINED HEREIN. Section 7.18 FURTHER ASSURANCES. Each party agrees to perform, execute and deliver, on or after the Closing, such further actions and documents as may be reasonably necessary or requested to more fully effectuate the purposes, terms and intent of this Agreement and the conveyances contemplated herein. IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of the date first written above. BUYER: SELLER: PALM, INC. 3COM CORPORATION, a Delaware corporation, a Delaware corporation By: /s/ John Igoe By: /s/ Abe Darwish -------------------------- ------------------------- Name: John Igoe Name: Abe Darwish ------------------------ ------------------------ Its: Vice President, Real Its: Vice President, Real Estate and Site Services Estate and Site Services ------------------------ ------------------------ 20 EXHIBIT A DESCRIPTION OF LAND All of that certain real property in the County of Santa Clara, State of California, described as follows: A-1 EXHIBIT B FORM OF ASSIGNMENT OF INTANGIBLE PROPERTY THIS ASSIGNMENT OF INTANGIBLE PROPERTY, made as of _______________, 2000, by and between 3COM CORPORATION, a Delaware corporation ("ASSIGNOR"), and _______________, a ____________________ ("ASSIGNEE"), W I T N E S S E T H FOR GOOD AND VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, Assignor and Assignee agree as follows: 1. ASSIGNMENT AND ASSUMPTION. (a) Assignor hereby assigns and transfers to Assignee all right, title and interest of Assignor in and to the intangible property which consists of reports regarding the physical condition of that certain real property (the "Land") described in EXHIBIT A hereto and to the extent applicable to the Land, Seller's rights under those certain documents listed in EXHIBIT B hereto, to the extent transferable (the "Intangible Property"). (b) Assignee hereby accepts the foregoing assignment, and assumes and agrees to perform all of the covenants and agreements in the Intangible Property to be performed by the owner of the Land, which accrue from and after the date hereof. 2. "AS-IS". This assignment is made by Assignor "as-is" without warranties, express or implied, other than that to the extent Assignor assigns any rights to reports prepared by third parties for Assignor, Assignor shall have paid all amounts due from Assignor to the preparers of such reports. 3. FURTHER ASSURANCES. Assignor and Assignee agree to execute such other documents and perform such other acts as may be reasonably necessary or proper and usual to effect this Assignment. 4. GOVERNING LAW. This Assignment shall be governed by and construed in accordance with the laws of the State of California. 5. SUCCESSORS AND ASSIGNS. This Assignment shall be binding upon and shall inure to the benefit of Assignor and Assignee and their respective personal representatives, heirs, successors and assigns. 6. COUNTERPARTS. This Assignment may be executed in counterparts, and all counterparts so executed shall constitute one agreement, binding on all parties, even though all parties are not signatory to the same counterpart. B-1 IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment as of the date first hereinabove written. ASSIGNOR: 3COM CORPORATION, a Delaware corporation By: ------------------------ Name: ---------------------- Its: ----------------------- ASSIGNEE: [--------------------------] a -------------------------- By: ------------------------ Name: ---------------------- Its: ----------------------- By: ------------------------ Name: ---------------------- Its: ----------------------- B-2 Exhibit A to Assignment of Intangible Property DESCRIPTION OF THE LAND B-3 Exhibit B To Assignment of Intangible Property LIST OF PERMITS Development Agreement by and between the City of San Jose and 3Com Corporation relative to the Development of Property in North San Jose, dated August 5, 1997, as amended. Site Development Permit HSH 96-12-089, as amended. B-4 EXHIBIT C FORM OF DEPOSIT ESCROW INSTRUCTIONS May 22, 2000 First American Title Company 1737 North First Street San Jose, CA 95112 Attn: Carol Weir Re: Purchase and Sale of Land at Highway 237 and North First Street, San Jose, California Your Escrow No. 518350 Ladies/Gentlemen: 3Com Corporation, a Delaware corporation ("SELLER"), and Palm, Inc., a Delaware corporation ("BUYER") have entered into that certain Agreement for Purchase and Sale of Land at Highway 237 and North First Street, San Jose, California, dated as of May 22, 2000 (the "AGREEMENT"), pursuant to which Seller has agreed to sell and convey to Buyer certain real property situated in San Jose, California (as more particularly described in the Agreement, the "PROPERTY"), and Buyer has agreed to purchase the Property from Seller. You have opened the above-referenced escrow (the "ESCROW") in connection with the transaction contemplated by the Agreement. Pursuant to the terms of the Agreement, Buyer is herewith depositing into Escrow the sum of $2,500,000 ("INITIAL DEPOSIT") which amount shall be credited against the purchase price for the Property to be purchased by Buyer from Seller. If on or before July 6, 2000, Buyer gives notice to you demanding return of the Initial Deposit, you are to do so promptly and without further notice from Seller. If you receive additional funds from Buyer as an increase to the Initial Deposit, all amounts held by you shall be the "DEPOSIT." After July 6, 2000, you shall not make any disbursements from Escrow except upon the joint instructions of both Seller and Buyer. Any amounts held by you in this Escrow as the Deposit may, at Buyer's direction, be invested initially for Buyer's account. Buyer's tax identification number is ________________. All such investments shall be subject to Seller's consent, which Seller agrees shall not unreasonably be withheld. C-1 These deposit escrow instructions may be executed in one or more counterparts. All counterparts so executed shall constitute one set of instructions, binding on all parties, even though all parties are not signatories to the same counterpart. By signing below you hereby acknowledge the terms contained herein and agree to proceed strictly in accordance herewith. Time is of the essence of these instructions. Sincerely, SELLER: 3Com Corporation, a Delaware corporation By: --------------------------- Name: ------------------------- Its: -------------------------- BUYER: PALM, INC., a Delaware corporation By: --------------------------- Name: ------------------------- Its: -------------------------- By: --------------------------- Name: ------------------------- Its: -------------------------- AGREED AND ACKNOWLEDGED: FIRST AMERICAN TITLE COMPANY By: Dated: ---------------------------- -------------------------- Name: -------------------------- Its: --------------------------- C-2 EXHIBIT D [RESERVED] D-1 EXHIBIT E FORM OF RELEASE AGREEMENT AND COVENANT NOT TO SUE WHEN RECORDED, RETURN TO: Thelen Reid & Priest LLP 101 Second Street, Suite 1800 San Francisco, CA 94105 Attention: Richard Shapiro RELEASE AGREEMENT AND COVENANT NOT TO SUE THIS RELEASE AGREEMENT AND COVENANT NOT TO SUE ("RELEASE AGREEMENT") is dated ____________________, 2000 ("AGREEMENT DATE"), and is made and entered into by and among _______________________, a _____________, ("Buyer"), and 3Com Corporation, a Delaware corporation ("SELLER"). R E C I T A L S This Release Agreement is made with reference to the following facts and intentions of the parties: A. A Purchase and Sale Agreement dated as of May 22, 2000 has been entered into by and between Palm, Inc., a Delaware corporation, Buyer's predecessor-in-interest, and Seller ("PURCHASE AGREEMENT"), for the purchase and sale of certain real property described in EXHIBIT A attached hereto (the "PROPERTY"). B. Pursuant to and as a condition of Seller's obligations under the Purchase Agreement, Buyer has agreed to execute and record this Release Agreement in the Official Records of the City and County of Santa Clara, California, on the Closing Date (as that term is defined in the Purchase Agreement) immediately following the recording therein of the grant deed pursuant to the Purchase Agreement and prior to the recording of any other matters or liens that would affect title in order to set forth the agreement of the parties herein. C. This Agreement is intended to provide a full and complete release, waiver of rights, and covenant not to sue, for the benefit of the Released Parties (as defined in Section 3 below) concerning matters relating to Hazardous Materials, Waste Materials and environmental matters concerning the Property, as more fully set forth below. D. Seller would not have agreed to enter into the Purchase Agreement and become obligated to convey the Property to Buyer without a condition thereto being the entry into this Release Agreement by the parties hereto. E-1 A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing recitals and as a material part of the consideration for the entering into the Purchase Agreement, the conveyance of the Property to Buyer and for other valuable consideration receipt of which is hereby acknowledged, the parties hereto agree to the provisions hereinafter set forth, as follows: 1. RELEASE. The release of Claims (as defined below) set forth in this Section 1 shall be referred to as the "RELEASE". Buyer hereby for itself and each and all of its successors-in-interest in chain of fee title to the Property and each and all of their respective heirs, executors, successors and assigns (collectively, the "WAIVER PARTIES") hereby forever, absolutely, unconditionally and completely releases and discharges the Released Parties (as defined in Section 3 hereof) from and against any and all actual, threatened or potential claims, suits, proceedings, actions, causes of action, demands, liabilities, losses, obligations, orders, requirements or restrictions, liens, penalties, fines, charges, debts, damages, costs, and expenses of every kind and nature, whether now known or unknown, whether foreseeable or unforeseeable, whether under any foreign, federal, state or local law (both statutory and nonstatutory), whether asserted or demanded by a third party against any of the Waiver Parties or incurred directly or indirectly by any of the Waiver Parties themselves, that any of the Waiver Parties may now or hereafter have against any of the Released Parties (collectively, "CLAIMS"), and that arise in connection with or in any way are related to (i) any Handling (as defined in Section 3 hereof) of any Waste Materials or Hazardous Materials at, beneath, to, from or about the Property, (ii) any compliance or non-compliance with Environmental Laws (as defined in Schedule 3 below) regarding any Waste Materials, Hazardous Materials or any Handling related thereto at, beneath, to, from or about the Property, (iii) any acts, omissions, services or other conduct related to any of the foregoing items "(i)" or "(ii)," inclusive, and/or (iv) any condition, activity or other matter respecting the Property that is not addressed by any of the foregoing items "(i)" - "(iii)," inclusive and that is related to pollution or protection of the environment, natural resources, or public health and safety. 2. CIVIL CODE SECTION 1542 RELEASE. In furtherance of the intentions set forth herein, Buyer acknowledges that it is familiar with Section 1542 of the California Civil Code, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Buyer, on behalf of itself and the other Waiver Parties, waives and relinquishes any right or benefit which it has or may have under California Civil Code Section 1542 or any similar provision of the statutory or nonstatutory law of any other jurisdiction, pertaining to the Released Matters. Buyer acknowledges that in connection with such waiver and relinquishment, it is aware that it or its attorneys, accountants, consultants or other experts or representatives or contractors may hereafter discover facts, liabilities, claims or other matters in addition to or E-2 different from those which it now knows to believe to exist with respect to the Released Matters, but that it is Buyer's intention to hereby fully, finally and forever to release all of the Released Matters as set forth herein. In furtherance of this intention, the Release shall be and remain in effect as full and complete notwithstanding the discovery or existence of any such additional or different claim or fact. 3. DEFINITIONS. (a) ENVIRONMENTAL LAWS. The term "ENVIRONMENTAL LAWS" means any applicable foreign, federal, state or local law, statute, regulation, rule, ordinance, permit, prohibition, restriction, license, requirement, agreement, consent, or approval, or any determination, directive, judgment, decree or order of any executive, administrative or judicial authority at any federal, state or local level (whether now existing or subsequently adopted or promulgated) relating to pollution or the protection of the environment, natural resources or public health and safety. (b) HANDLING. The term "HANDLING" means, at any time and to any extent and in any manner whatsoever, any presence of or any handling, storing, transferring, transporting, treating, using, recycling, separating, sorting, incinerating; transforming, reconstituting, containing, containerizing, packaging, manufacturing, generating, abandoning, covering, capping, dumping, closing, maintaining, disposing, placing, discarding, encapsulating, filling, landfilling, investigating, monitoring, remediating, removing, responding to, reporting on, testing, releasing, contamination resulting from, spilling, leaking, pouring, emitting, emptying, discharging, injecting, escaping, migrating, or leaching. (c) HAZARDOUS MATERIALS. The term "HAZARDOUS MATERIALS" means any material, waste, chemical, compound, substance, mixture, or byproduct that is identified, defined, designated, listed, restricted or otherwise regulated under Environmental laws as a "hazardous constituent," "hazardous substance," "hazardous material," "extremely hazardous material," "hazardous waste," "acutely hazardous waste," "hazardous waste constituent," "infectious waste," "medical waste," "biohazardous waste," "extremely hazardous waste," pollutant," "toxic pollutant," or "contaminant," or any other formulation intended to classify substances by reason of properties that are deleterious to the environment, natural resources or public health or safety including, without limitation, ignitability, corrosiveness, reactivity, carcinogenicity, toxicity, and reproductive toxicity. The term "HAZARDOUS MATERIALS," shall include, without limitation, the following: i. A "Hazardous Substance," "Hazardous Material," "Hazardous Waste," or "Toxic Substance" under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq. or the Solid Waste Disposal Act, 42 U.S.C. Section 6901, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended; ii. An "Acutely Hazardous Waste," "Extremely Hazardous Waste," "Hazardous Waste," or "Restricted Hazardous Waste," under Section 25110.02, 25115, 25117 or E-3 25122.7 of the California Health and Safety Code, or listed pursuant to Section 25140 of the California Health and Safety Code, as any of the foregoing may be amended; iii. A "Hazardous Material," "Hazardous Substance" or "Hazardous Waste" under Section 25281, 25316, 25501, or 25501.1 of the California Health and Safety Code, as any of the foregoing may be amended; iv. "Oil" or a "Hazardous Substance" under Section 311 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1321, as may be amended; as well as any other hydrocarbonic substance, fraction, distillate or by-product; v. Any substance or material defined, identified or listed as an "Acutely Hazardous Waste," Extremely Hazardous Material," "Extremely Hazardous Waste," "Hazardous Constituent," Hazardous Material," Hazardous Waste," "Hazardous Waste Constituent," or "Toxic Waste" pursuant to Division 4.5, Chapters 10 or 11 of Title 22 of the California code of Regulations, as may be amended; vi. Any substance or material listed by the State of California as a chemical known by the State to cause cancer or reproductive toxicity pursuant to Section 25249.8 of the California Health and Safety Code, as may be amended; vii. A "Biohazardous Waste" or "Medical Waste" under Section 25020.5 of the California Health and Safety Code, as may amended; viii. Asbestos and any asbestos containing material; and/or ix. A substance that, due to its characteristics or interaction with one or more other materials, wastes, chemicals, compounds, substances, mixtures, or byproducts, damages or threatens to damage the environment, natural resources or public health or safety, or is required by any law or public entity to be remediated, including remediation which such law or public entity requires in order for property to be put to any lawful purpose. (d) RELEASED PARTIES. The term "RELEASED PARTIES" means Seller, any other partners or co-venturers of Seller, any entity or person which is controlled by, under common control with or controls Seller or has a beneficial interest in common with Seller, parent business organizations, subsidiary business organizations, lenders who hold or held a security interest in all or a portion of the Property, the entity from which Seller acquired the Property, and its and their respective shareholders, officers, directors, partners, employees, servants, trustees, heirs and executors. (e) WASTE MATERIALS. The term "WASTE MATERIALS" means any putrescible or nonputrescible solid, semisolid, liquid or gaseous waste of any type whatsoever, including, without limitation; i. Any garbage, trash, refuse, paper, rubbish, ash, industrial or commercial or residential waste, demolition or construction wastes, abandoned vehicles or parts thereof, discarded home and industrial appliances, sewage, sewage sludge, manure, vegetable or E-4 animal solid and semisolid waste, and any other item intended to be or actually dumped, abandoned, discarded, treated, transformed, incinerated, disposed of or recycled; ii. Any "solid waste" as defined in the Solid Waste Disposal Act, 42 U.S.C. Section 6901, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended; iii. Any "solid waste" as defined in the California Integrated Waste Management Act of 1989, California Public Resources Code Section 40000, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended. iv. Any "waste" as defined in the Porter Cologne Water Quality Control Act, California Water Code Section 13000 et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended. 4. COVENANT NOT TO SUE. Buyer, on its own behalf and on behalf of each of the other Waiver Parties, covenants and agrees never to sue or otherwise commence, or prosecute any action or other proceeding against any of the Released Parties for a Claim released pursuant to the Release (collectively, "COVENANT NOT TO SUE"). If any of the Waiver Parties asserts a claim that is contrary to the Release, said Waiver Party shall indemnify and hold harmless the Released Parties against whom such claim is asserted for all liabilities, including court costs and attorneys' fees, which are asserted against any of the Released Parties in connection with such action or proceeding. The parties hereto agree that this Release Agreement may be pleaded by a Released Party as a full and complete defense to any action or proceeding by a Waiver Party that is contrary to the terms of the Release, and may be asserted as a basis for abatement of, or injunction against, said action or proceeding and as a basis for a cross-complaint for damages therein. In the event a Waiver Party breaches the Covenant Not to Sue, any Released Party damaged thereby shall be entitled to recover not only the amount of any judgment which may be awarded in favor of such damaged Released Party but also for such other damages, costs, and expenses as may be incurred by such Released Party, including court costs, attorneys' fees and all other costs and expenses, taxable or otherwise, in preparing the defense of, defending against, or seeking and obtaining abatement of, or injunction against, such action or proceeding, and establishing and maintaining the applicability of the Release and this Release Agreement or any provision thereof. 5. INDEMNITY. Buyer shall indemnify, defend and hold the Released Parties harmless from and against any and all Claims (as such term is defined in Section 1(a)) to the extent caused by (i) any Handling of any Waste Materials or Hazardous Materials at, beneath, to, from or about the Property from and after the date of this Agreement and during the period Buyer owns the Property, (ii) any compliance or noncompliance with Environmental Laws from and after the date of this Agreement and during the period Buyer owns the Property regarding any Waste Materials, or Hazardous Materials related thereto which becomes located at or discharged or released from the Property during the period Buyer owns the Property, (iii) any acts, omissions, services or other conduct related to any of the foregoing items "(i)" or "(ii)," inclusive, and/or (iv) any condition, activity or other matter respecting the Property that is not addressed by any of the foregoing items "(i)" - "(iii)," inclusive and that is related to pollution or protection of the E-5 environmental, natural resources, or public health and safety and which occurs or accrues on or after the date of this Agreement. 6. RECORDATION. It is the intention of the parties hereto that the provisions of this Release Agreement shall run with the land described in EXHIBIT A, and that this Release Agreement shall be recorded in the Official Records of the County of Santa Clara, California, as set forth in Recital Paragraph "A," above. 7. EFFECTIVE DATE. This Release Agreement shall become effective immediately upon filing for record in the Official Records of Santa Clara, California. 8. NOTICE. Any notice or other communication required or desired to be given hereunder shall be in writing and shall be personally delivered, or delivered by commercial courier or by United States Mail, registered or certified, postage prepaid, return receipt requested, and shall be deemed delivered only upon actual receipt by the addressee or refusal to accept delivery. Mailed notices to the Buyer or the shall be addressed as set forth below: If to Seller: 3Com Corporation 5400 Bayfront Plaza Santa Clara, CA 95052 Attn: Abe Darwish Tel: (408) 326-5000 Fax: (408) 326-5718 with a copy to: Thelen Reid & Priest LLP 101 Second Street, Suite 1800 San Francisco, CA 94105 Attn: Richard Shapiro Tel: (415) 369-7117 Fax: (415) 371-1211 If to Buyer: Attn: Tel: ( ) Fax: ( ) with a copy to: ____________________________ ____________________________ ____________________________ Tel: _______________________ Fax: ______________________ 9. MISCELLANEOUS. a. This Release Agreement constitutes the entire understanding between the parties hereto respecting the subject matter hereof, and no additions to, or modifications of, any E-6 term or provision of this Release Agreement shall be effective unless set forth in writing and signed by all of the parties hereto, and appropriately recorded in the Official Records of Santa Clara County. b. Without limiting the rights remedies of the Released Parties as provided in Section 4 hereof regarding the Covenant Not to Sue, in the event of any controversy, claim or dispute between the parties arising out of or relating to this Release Agreement or the breach thereof, the prevailing party shall be entitled to recover from the other party reasonable expenses, attorneys, fees, and costs. "PREVAILING PARTY" within the meaning of this Section shall include, without limitation, a party who brings an action against the other party after the other party is in breach or default, if such action is dismissed upon the other party's payment of the sums allegedly due or performance of the covenant allegedly breached, or if the party commencing such action or proceeding obtains substantially the relief sought by it in such action whether or not such action proceeds to a final judgment or determination. c. All captions and headings in this Release Agreement are for purposes of reference and convenience only and shall not limit or expand the meaning of the provisions hereof. d. This Release Agreement and each provision hereof shall be interpreted in accordance with their fair meaning and not against or in favor of any party. e. This Release Agreement shall in all respects be governed by and construed in accordance with the laws of the State of California applicable to instruments, persons and transactions which have legal contacts and relationships solely within the State of California. If any provisions of this Release Agreement shall be invalid, unenforceable, or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. E-7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SELLER: 3Com Corporation, a Delaware corporation By:___________________________ Name:_________________________ Its:__________________________ BUYER: [____________________________], a_____________________________ By:___________________________ Name:_________________________ Its:__________________________ By:___________________________ Name:_________________________ Its:__________________________ E-8 Exhibit A to Release Agreement and Covenant Not To Sue PROPERTY DESCRIPTION All of that certain real property in the County of Santa Clara, State of California, described as follows: E-9 STATE OF CALIFORNIA ) ) ss. City and County of ____________) On _______________, 2000, before me _________________________, a Notary Public in and for the State of California, personally appeared ____________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument, and acknowledged to me that he executed the within instrument in his authorized capacity and that, by his signature on the within instrument, the person or entity upon behalf of which he acted executed the within instrument. WITNESS my hand and official seal. Signature ____________________________________ (Seal) STATE OF CALIFORNIA ) ) ss. City and County of ____________) On _______________, 2000, before me _________________________, a Notary Public in and for the State of California, personally appeared ____________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument, and acknowledged to me that he executed the within instrument in his authorized capacity and that, by his signature on the within instrument, the person or entity upon behalf of which he acted executed the within instrument. WITNESS my hand and official seal. Signature ____________________________________ (Seal) E-10 EXHIBIT F FORM OF GRANT DEED Recorded at Request of and When Recorded Mail to: __________________________________ __________________________________ __________________________________ Attention:________________________ Mail Tax Statement to: __________________________________ __________________________________ __________________________________ __________________________________ GRANT DEED For valuable consideration, receipt of which is acknowledged, 3Com Corporation, a Delaware corporation, hereby grants to ___________________________________, a ____________________, the real property in the County of Santa Clara, State of California, described in EXHIBIT A attached hereto and made a part hereof, subject to all matters of record. Dated: ____________________, 2000. 3Com Corporation, a Delaware corporation By:_________________________ Name:_______________________ Title:______________________ F-1 Exhibit A to Grant Deed PROPERTY DESCRIPTION All of that certain real property in the County of Santa Clara, State of California, described as follows: F-2 STATE OF CALIFORNIA ) ) ss. City and County of ____________) On _______________, 2000, before me _________________________, a Notary Public in and for the State of California, personally appeared ____________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument, and acknowledged to me that he executed the within instrument in his authorized capacity and that, by his signature on the within instrument, the person or entity upon behalf of which he acted executed the within instrument. WITNESS my hand and official seal. Signature ____________________________________ (Seal) F-3 EXHIBIT G FORM OF AFFIDAVIT CERTIFICATE OF NON-FOREIGN STATUS Section 1445 of the Internal Revenue Code provides that a buyer of a U.S. real property interest must withhold tax if the transferor is a foreign person. To inform __________________ ("BUYER") that a withholding of tax is not required upon the disposition of a U.S. real property interest by 3Com Corporation, a Delaware corporation ("SELLER"), the undersigned hereby certifies the following on behalf of Seller: 1. Seller is not a foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations); 2. Seller's U.S. employer identification number is ___________; and 3. Seller's office address is 5400 Bayfront Plaza, Santa Clara, CA 95052. Seller understands that this certification may be disclosed to the Internal Revenue Service by the Buyer and that any false statement contained herein could be punished by fine, imprisonment, or both. Under penalties of perjury I declare that I have examined this certificate and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of Seller. Dated: ___________________, 2000. 3Com Corporation, a Delaware corporation By:___________________________ Name:_________________________ Title:________________________ G-1 EXHIBIT H FORM OF DESIGNATION AGREEMENT (Escrow No. ______________) THIS DESIGNATION AGREEMENT (the "AGREEMENT"), dated as of _____________, 2000, is entered into by and between 3Com Corporation, a Delaware corporation (the "SELLER"), and ____________________________ ("BUYER"), and ___________________________, ("TITLE COMPANY"). I. RECITALS A. Pursuant to that certain Agreement for Purchase and Sale entered into by and between Seller and Palm, Inc., dated as of May 22, 2000 (the "PURCHASE AGREEMENT"), Seller has agreed to sell to Buyer, and Buyer has agreed to buy from Seller, an undivided interest in that certain real property located in the County of Santa Clara, State of California, and described more fully on attached EXHIBIT A (the "PROPERTY"). The purchase and sale of the Property pursuant to the Purchase Agreement is sometimes referred to below as the "TRANSACTION." B. Section 6045(e) of the United States Internal Revenue Code and the regulations promulgated thereunder (collectively, the "REPORTING REQUIREMENTS") require an information return to be made to the United States Internal Revenue Service, and a statement to be furnished to Seller, in connection with the Transaction. C. Pursuant to the Purchase Agreement, an escrow has been opened with Title Company through which the Transaction will be or is being closed. Title Company is either (i) the person responsible for closing the Transaction (as described in the Reporting Requirements) or (ii) the disbursing title or escrow company that is most significant in terms of gross proceeds disbursed in connection with the Transaction (as described in the Reporting Requirements). D. Seller, Buyer and Title Company desire to designate Title Company as the "REPORTING PERSON" (as defined in the Reporting Requirements) with respect to the Transaction as permitted by Treas. Reg. Section 1.6045-4(e)(5). II. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Seller, Buyer and Title Company agree as follows: 1. Title Company is hereby designated as the Reporting Person for the Transaction. Title Company shall perform all duties that are required by the Reporting Requirements to be performed by the Reporting Person for the Transaction. H-1 2. Title Company hereby requests Seller to furnish to Title Company Seller's correct taxpayer identification number. Pursuant to such request, Seller hereby certifies to Title Company, under penalties of perjury, that Seller's correct taxpayer identification number is ___________. Seller acknowledges that any failure by to provide Title Company with Seller's correct taxpayer identification number may subject to civil or criminal penalties imposed by law. 3. The names and addresses of the parties hereto are as follows: SELLER: 3Com Corporation 5400 Bayfront Plaza Santa Clara, CA 95052 Attn: Abe Darwish or Bill Skibitzke BUYER: ______________________________ ______________________________ ______________________________ Attn:_________________________ TITLE COMPANY: First American Title Company 1737 North First Street San Jose, CA 95112 Attn: Carol Weir 4. Each of the parties hereto shall retain this Agreement for a period of four (4) years following the calendar year during which the date of closing of the Transaction occurs. H-2 IN WITNESS WHEREOF, the parties have entered into this Agreement. 3Com Corporation, a Delaware corporation By:_________________________ Name:_______________________ Title:______________________ [___________________________] By:_________________________ Name:_______________________ Title:______________________ By:_________________________ Name:_______________________ Title:______________________ First American Title Company By:_________________________ Name:_______________________ Title:______________________ H-3 Exhibit A to Designation Agreement PROPERTY DESCRIPTION All of that certain real property in the County of Santa Clara, State of California, described as follows: H-4 EXHIBIT I PRELIMINARY TITLE REPORT I-1 EXHIBIT J FORM OF CONFIDENTIALITY AGREEMENT May 22, 2000 Palm, Inc. 5400 Bayfront Plaza Santa Clara, CA 95052 Re: CONFIDENTIALITY AGREEMENT Ladies and Gentlemen: 3Com Corporation ("SELLER") is the owner or the lessee of certain real property within the City of San Jose, California, identified as approximately 36.43 acres of vacant land at Highway 237 and North First Street, San Jose (the "PROPERTY"). The undersigned is the prospective buyer of the Property, or its employee, consultant, prospective lender or investor ("RECIPIENT"). To induce Seller to permit the Recipient to review and inspect certain documents, files and other information relating to the Property and/or to perform tests or inspections of the Property ("CONFIDENTIAL INFORMATION," more fully defined below), and in consideration of Seller permitting such review and inspection, by signing where indicated below, Recipient, on behalf of itself, its employees, agents and representatives, hereby agrees and covenants as follows: AGREEMENT 1. PURPOSE. Recipient agrees that its review and inspection of the Confidential Information shall be solely to conduct due diligence, on its own behalf and not as an agent, representative or broker of any undisclosed party, to enable Recipient, or the prospective buyer to which it provides counsel and which has been identified to Seller to determine whether or not to purchase the Property ("EVALUATION"). Recipient shall indemnify Seller and the agents, attorneys, and advisors of Seller (collectively, the "INDEMNIFIED PARTIES") and hold such Indemnified Parties harmless against all costs and expenses of any kind, including but not limited to attorneys' fees or claims by third parties of any right to brokerage commissions or fees, incurred by or on behalf of any Indemnified Party arising out of the Recipient's use or disclosure of the Confidential Information except as expressly permitted by the terms hereof. 2. INFORMATION TO BE KEPT IN STRICT CONFIDENCE. The Recipient will use the Confidential Information solely for the purpose of the Evaluation and will keep the Confidential Information strictly confidential. The Recipient will not disclose Confidential Information to others, or take or use Confidential Information for its own purposes or the purposes of others; PROVIDED, HOWEVER, that the Recipient may disclose Confidential Information to attorneys, accountants, architects, engineers, consultants and/or financial advisers of Recipient that: (a) for purposes of the Evaluation, need to know the specific Confidential Information so disclosed in J-1 order to assist in the Evaluation; and (b) have executed and delivered to Seller an agreement in a form such as this. "CONFIDENTIAL INFORMATION" shall consist of any information, whether written (including information that is stored on machine-readable media) or oral, regarding the Property, the operation thereof and assets related thereto, that previously has not been publicly released by a duly authorized representative of Seller; including but not limited to proprietary information, any summary of information provided by Seller, leases, rent roll, operating statements, plans and specifications, engineering reports, Phase I report, survey of the Property, asbestos reports, permits, licenses, and contracts affecting the Property, or any information relating to the environmental condition of the Property or compliance by the buildings thereon with ADA, or any market analyses or lease proposals prepared by the property manager or others on behalf of Seller. 3. NON-DISCLOSURE OF NEGOTIATIONS. That the fact that Seller and Recipient or the principal to which it reports have entered into negotiations with respect to a potential purchase and sale of the Property and that Confidential Information has been provided to the Recipient shall also be kept strictly confidential by the Recipient and shall be deemed to be "CONFIDENTIAL INFORMATION" for purposes of this Agreement. 4. MAINTENANCE OF RECORDS. Recipient will maintain a record of the specific individuals to whom Confidential Information has been provided (each, an "INFORMED INDIVIDUAL") and will be responsible for any breach of any of the agreements contained herein by any Informed Individual. No Informed Individual shall disclose to any other person the fact that the Confidential Information has been made available to such Informed Individual. 5. DISCLOSURE REQUIRED BY LAW. If disclosure of Confidential Information is compelled by deposition, interrogatory, subpoena, civil investigative demand or similar legal process, Recipient shall give prompt notice to Seller so that Seller may seek an appropriate protective order and/or take any other action. In the event that a protective order is not obtained, or that Seller waives compliance with the agreements contained herein, Recipient: (a) may disclose to the tribunal or other person the specific Confidential Information or other information that, in the written opinion of counsel for Recipient (a copy of which shall be promptly delivered to Seller), Recipient or an Informed Individual is legally required to disclose; and (b) shall exercise best efforts to obtain assurance that confidential treatment will be accorded to any such disclosed Confidential Information. 6. RETURN OF CONFIDENTIAL INFORMATION. Immediately upon the request by Seller, Recipient shall: (a) deliver to Seller all copies of any Confidential Information, including all copies of Confidential Information delivered to, reproduced or discovered by the Recipient or an Informed Individual; (b) deliver to Seller or destroy all notes, reports, analyses and other records that include, incorporate or are based on any of the Confidential Information (collectively, "CONFIDENTIAL NOTES"); and (c) certify to Seller in writing that all copies of Confidential Information and Confidential Notes have been delivered to Seller or destroyed. Any copy of Confidential Information that is not in a physical form shall continue to be subject to the agreements set forth herein. J-2 7. NO REPRESENTATION OR WARRANTY. Neither Seller, nor its agents or employees makes any representation or warranty as to the accuracy or completeness of the Confidential Information and shall have no liability to Recipient or any Informed Individual relating to or resulting from the use of the Confidential Information, or any errors therein or omissions therefrom. 8. MONEY DAMAGES INADEQUATE REMEDY. Recipient acknowledges that it would be difficult to measure damage to Seller from any breach of any of the agreements contained herein, that injury to Seller from any such breach would be difficult to calculate, and that money damages therefore would be an inadequate remedy for any such breach. Accordingly, if Recipient or any Informed Individual breaches any of the agreements herein, Seller shall be entitled, in addition to any other remedies it may have, to equitable relief, including injunctions, specific performance or other appropriate orders to restrain any such breach, without showing or proving any actual damage sustained. 9. GENERAL. 9.1 SEVERABILITY. If any agreement set forth herein, or any word, phrase, clause or sentence or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, such agreement, word, phrase, clause or sentence shall be modified or deleted in such a manner so as to make the agreement valid and enforceable under applicable laws, if possible, and the application of such provision to other persons or circumstances and the remainder of the agreements set forth herein shall not be affected and shall be enforced to the greatest extent permitted by law. 9.2 SUCCESSORS AND ASSIGNS. The agreements set forth herein shall be binding upon the Recipient and its affiliates, successors and assigns and shall inure to the benefit of Seller and its affiliates, successors and assigns. 9.3 INTERPRETATION. As used herein where required by the context, the singular shall include the plural, and the plural shall include the singular. 9.4 ENTIRE AGREEMENT. The agreements herein represent the entire agreement between Recipient and Seller with respect to the subject matter hereof, superseding all previous oral or written communications, representations or agreements, if any. Any modifications to the agreements set forth herein must be made in writing and executed by a duly authorized officer of Seller. 9.5 ATTORNEYS' FEES. In the event of any litigation between the parties, the prevailing party shall be entitled to recover its attorneys' fees and costs as part of the judgment. 9.6 WAIVER. No failure or delay by Seller in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof or the exercise of any other right, power or privilege hereunder so operate as a waiver. 9.7 CAPTIONS. Titles or captions herein are inserted only as a matter of convenience and for reference, and in no way define, limit, extend or describe the scope of the agreements herein or the intent of any provision hereof. J-3 9.8 SURVIVAL. The foregoing commitments shall survive any termination of the discussions between Seller and Recipient or any transaction between Seller and Recipient. 10. GOVERNING LAW. The agreements set forth herein shall be governed by the laws of the State of California, which state shall have jurisdiction of the subject matter hereof and over Recipient and Seller. Very truly yours, 3Com Corporation, a Delaware Corporation By:________________________ Name:______________________ Title:_____________________ Accepted and Agreed, as of May __, 2000 PALM, INC. a Delaware corporation By:_____________________________ Name:___________________________ Title:__________________________ By:_____________________________ Name:___________________________ Title:__________________________ J-4 EX-27.1 3 a2027596zex-27_1.txt EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 1, 2000 BALANCE SHEET AND STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-01-2001 SEP-01-2000 703,173 224,417 230,522 9,165 31,666 1,257,983 35,185 10,159 1,380,990 306,148 0 0 0 565 1,057,116 1,380,990 400,976 400,976 247,513 247,513 134,715 0 88 31,992 14,717 17,275 0 0 0 17,275 0.03 0.03
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